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THE HAnDbook of TEcHnIcAl AnAlysIs

the market has three trends

The second assumption of Dow Theory is that the market comprises three trends.
Robert Rhea explains, in his book The Dow Theory:

There are three movements of the averages, all of which may be in prog-

ress at one and the same time. The first, and the most important, is the

primary trend: the broad upward and downward movements known as

bull or bear markets, which may be of several years’ duration. The second,

and most deceptive movement, is the secondary reaction: an important

decline in a primary bull market or a rally in a primary bear market. The

reactions usually last from three weeks to as many months. The third and

usually unimportant movement is the daily fluctuation.

Summarizing, the market is believed to express itself as three distinct trends,
namely:

1. Primary trend (major trend)—lasting from months to years (long term)


2. Secondary reaction (intermediate trend)—lasting from weeks to months (me-
   dium term)


3. Minor trend—lasting from days to weeks (short term)

See Figure 2.3.

(1) the primary trend The largest trend is by far the primary trend, which is
normally expected to last from months to years. Rhea hypothesized that primary
trends are not susceptible to manipulation and therefore represent a more reliable

fIgure 2.3 All Three Trends in the NYSE Composite Index.
Courtesy of Stockcharts.com