Profiting from Market Trends: Simple Tools and Techniques for Mastering Trend Analysis

CHAPTER 3

Trend Duration

The origins of modern Western technical analysis can be traced back to the work of Charles Henry Dow in the late 1800s. Dow was a businessman, journalist, and member of the New York Stock Exchange. He created the Dow Jones Industrial Average and co-founded Dow Jones & Company. If you have read a few books on technical analysis, you've probably been introduced to Dow Theory in at least one of them. The tenets of Dow Theory have largely stood the test of time.

One of the basic principles of Dow Theory states that the market moves in trends. Dow recognized that trends provide the key to anticipating price movements. He observed three distinct market trends that he categorized by their duration. These classifications of trend duration have been widely accepted in technical analysis:

1. Long-term trend

2. Intermediate-term trend

3. Short-term trend

Trend analysis is a broad topic. It helps to categorize extensive subject matter in order to thoroughly present the information without overwhelming the recipients. In Chapter 2, the categorization was of the trend direction—up, down, or sideways. In this chapter, trends will be categorized by their duration—long, intermediate, and short. You'll learn the definition of these market trends and how to identify them on charts, and gain an understanding of their implications.

■ Long-Term Trend

A long-term trend may also be called the major or primary trend. Dow Theory suggests that a long-term trend is one that lasts ...