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Slower Downtrend

Published on February 3, 2015 by in Dow Theory

One of the primary tenets of Dow Theory is that secondary movements tend to be more steep than the move they are retracing. For example, the Dow Jones Industrial Average (DJIA) made a secondary low point in June of 2012. The subsequent rally lasted four months. Then the next decline retraced 50% of the rally in only six weeks. This is typical behavior during long term bullish trends.

What happened next isn’t typical. The market had a continuous rally lasting more than two years without a secondary reaction. This is because no price declines over that period retraced at least 33% of the move in a period lasting more than three weeks.

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We’ve now reached a point where both averages have declined for over a month. The fact that this decline has lasted over a month but is only down roughly 5 to 6% shows a market that is changing character. Instead of quick declines and retracements (V bottoms) we’re now seeing some sideways to slowly down consolidation. If the market makes another low it will mark the longest period of consolidation since the late 2012 rally began. This will warn that we’re probably seeing the beginning of a larger correction which will give the averages a chance to put in new secondary low points. In order to get the secondary lows both averages will have to basically retest the move back to the October lows (33% of the rally starting in 2012). The action of both averages coming out of any new secondary low will give us a new indication of the long term trend. Until then the market remains in a primary bullish trend.

 
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