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TREND DETERMING TECHIQUE
Relationship Between Primary Intermediate Moves and Subsequent Reactions
In Profits in the Stock Market, Gartley published a series of diagrams: using the classification of intermediate trends established by Robert Rhea. Gartley's conclusion was that the smaller in magnitude the primary intermediate-term movement was, the larger the retracement tended to be, and vice versa. He noted that this was just as valid for bull market reactions as for bear market rallies. Observations of the period since 1933 for virtually all markets appear to support this hypothesis. For example, the rally off the 1962 stock market low was only 18 percent, compared to the mean average of 30 percent between 1933 and 1982. This represented part of a double bottom formation and, therefore, the first primary intermediate rally. This relatively small advance was followed by a somewhat larger 71 percent retracement. However, the ensuing rally from late 1962 until mid-1963 was 32 percent and was followed by a small 25 percent retrace- ment of the gain. Interested readers may wish to be satisfied that what goes up does not necessarily come down, and vice versa.
The 1976-1980 gold bull market was very powerful, but the interm- ediate corrections were quite brief. On the other hand, the rallies between 1982 and 1990 were far less strong, but were followed by corrections of much greater magnitude proportionally.
Using Intermediate Cycles to Identify Primary Reversals
Number of Intermediate Cycles
A primary movement may normally be expected to encompass two and a half intermediate cycles (see Figure 4.3). Unfortunately, not all primary movements correspond to the norm; an occasional primary movement may consist of one, two, three, or even four intermediate cycles. Furthermore, these intermediate cycles may be of very unequal length or magnitude, making their classification and identification possible only after
the event. Even so, intermediate-cycle analysis can still be used as a basis for identifving the maturity of the primary trend in most cases. Whenever prices are well advanced in a primary intermediate trend following the complication of two intermediate cycles, technicians should be alerted to the fact that a reversal of the primarv trend itself mav be about to take place. Again, if only one intermediate cycle has been completed, the chances of prices reaching higher levels (lower levels in a bear market) are quite high.
Trend determining Techniques
the event. Even so, intermediate-cycle analysis can still be used as a basis for identifying the maturity of the primary trend in most cases
Whenever prices are well advanced in a primary intermediate trend following the complication of two intermediate cycles, technicians should be alerted to the fact that a reversal of the primary trend itself may be about to take place. Again, if only one intermediate cycle has been completed, the chances of prices reaching higher levels (lower levels in a bear market) are quite high.
Characteristics of the Final Intermediate Cycle in a Primary Trend
In addition to actually counting the number of intermediate cycles, it is possible to compare the characteristics of a particular cycle with those of a typical pivotal or reversal cycle of a primary trend. These characteristics are discussed in the tollowing sections,
Reversal from Bull to Bear Marke ince volume leads price, the failure of volume to increase above the levels of the p
Trend determining Techniques
phaseis a bearish sin. Alternativh,ifovera period of3 to4 wecks-volume expands on the intermediate rally close to the previous peak in volume but fails to move prices significantly, it represents churning and should alse be treated bearishly. Coincidence of cither of these characteristics with a downward crossover of a 40-week moving average (sec Chapter 11) or a divergence in an intermediate-term momentum index (see Chapter 13) would be an additional reason for caution
There are essentially two broad characteristics that suggest that the downward phase of an intermediate cyele could be the first downleg: of a bear market. The first is a substantial increase in volume during the price decline. The second is a cancellation or retracement of 80 percent or more of the up phase of that same intermediate cvele. The ereater ths retracement, the greater the probability that the basic trend has reversed especiallv because a retracement in excess of 100 percent means that am series of rivint trouchs has been broken. thereby placine the probbilities in favor of a chanee in the primary trend. Other sians would indlude:the observation of a mega oversold or an extreme swing (see Chapter 13 or momentum for a full explanation of these terms)
Reversal from Bear to Bull Market The first intermediate up phase of a bull market is usually accompanied by a substantial expansion in volume that is significantly greater than those of previous intermediate up phases. In other words, the first upleg in a bull market attracts noticcably more volume than anv of the intermediate ralties in the previous bear market, Another sien ofa basic reversal occurswhen prices retrace at least 80nercent of the previous decline. Again, the greater the proportion of retracement, the greater the odds of a reversal in the basic trend. If the retracement i greater than 100 percent, the odds cicarly indicate that a reversal in the downward trend has taken place because the series of declining peaks wil have broken down,
Since volume normally expands substantially as the intermediats down phase durins a bear market reaches a low. a shrinkage in volume dur- ins an intermediate decline could well be a warning that the bear market ha: run its course, This is especially true if the price does not reach a new lov during this intermediate dectine, since the series of declining intermediate cyclical lows, which is a characteristic of a bear market, may no longer b intact. An example of this is shown in Chart 8,12 where the overall peak ir volume was seen in the June 1962 decline rather than the August-October sell-off,
A final sign might include a mega overbought condition or an extrems swing: asain please refer to Chapter 13 for an exolanation of these concents
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