Dow Theory - Secondary Corrections

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colin_twiggs

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Post Number: 2959
Registered: 09-2002

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Tuesday, July 10, 2007 - 09:43 am:

Steve from the UK raised an interesting point:

I find your weekly trading diary an excellent overview of world stock and commodity markets. You recently (re-)categorised the late-Feb/early-March Dow stock market correction as a Dow-theory correction. My understanding of Rhea's work is that while he does record some brief declines as secondary reactions, none are BOTH brief and shallow. To qualify as a secondary reaction would appear to require "fudging" on both the important criteria. Or have I missed something? Many thanks in advance for your response.

Rhea's definition says: "a secondary reaction is considered to be an important decline in a bull market or advance in a bear market, usually lasting from three weeks to as many months, during which interval the price movement generally retraces from 33 per cent to 66 per cent of the primary price change...". Use of "either .... or" in place of "usually" and "generally" would have removed much of the uncertainty, but I believe that Rhea was deliberate in his choice of words - thereby allowing himself some discretion in determining whether a reaction is an "important decline....or advance".

I would appreciate other readers views.

Regards,
Colin

(Message edited by colin_twiggs on July 12, 2007)

colin_twiggs

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Tuesday, July 10, 2007 - 10:20 am:

Here is an illustration of the problem: The Shanghai Composite Index retraced 27.5% in 9 days. Does that qualify as a secondary correction?

Regards,
Colin

tryhay

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Wednesday, July 11, 2007 - 05:13 pm:

Colin, your question requires an answer. The trouble is I do not think there is a satisfactory one in this post modern world! I personally don't much care about the permutations in the Shanghai Composite Index (even though its bubble bursting may have devastating effect on world markets one day) as they do not currently seem to be impacting our market. The daily variation in our market index ~ and perhaps US markets (due to local causes and the balance of buying and selling at that particular time) is of more import because the market/s seems to be sliding sideways for longer than has been experienced recently.

To place today’s market into context the primary trends model provided at this link <http://www.incrediblecharts.com/technical/dow_theory_trends.htm> shows the ideal holistic system view of the operation of markets. I suggest that using a rule based approach (like Rhea's) to determine where in the model we are is flawed (but better than no plan at all). To invest/trade successfully one needs an eclectic approach to responding to market changes and if the particular approach adopted is not working (because you are loosing too much capital then Plan B is probably the next best approach.

Running the ruler over the market as events are happening (at the right hand side of the chart) has a much too higher level of uncertainty for my liking and so I routinely hedge my portfolio, and buy call options/warrants on breakout.

Perhaps an unsatisfactory answer but better than the sounds of silence IMO

Mark