Dow Theory - Trends
The start of an up trend is signaled when price makes a higher low (trough), followed by a rally above the previous high(peak):
The end is signaled by a lower high (peak), followed by a decline below the previous low (trough):
What if the series of higher Highs and higher Lows is first broken by a lower Low? There are two possible interpretations - see Large Corrections.
A bear trend starts at the end of a bull trend: when a rally ends with a lower peak and then retreats below the previous low. The end of a bear trend is identical to the start of a bull trend.
What if the series of lower Highs and lower Lows is first broken by a higher High? This is a gray area - see Large Corrections below.
Some purists argue that a trend ends if the sequence of higher highs and higher lows is broken. Others argue that a bear trend has not started until there is a lower High and Low nor has a bull trend started until there is ahigher Low and High.
For practical purposes, only accept large corrections as trend changes in the primary trend.
Dow recognized that trends changed when the pattern of peaks and troughs reversed.
Bull Trends
A bull trend is identified by a series of rallies where each rally exceeds the highest point of the previous rally. The decline between rallies ends above the lowest point of the previous decline. A series of successive higher highs and higher lows.
Start = higher Low + break above previous High.
The end is signaled by a lower high (peak), followed by a decline below the previous low (trough):
End = lower High + break below previous Low.
Bear Trends
Each successive rally fails to penetrate the high point of the previous rally. Each decline terminates at a lower point than the preceding decline. A series of successive lower highs and lower lows.What if the series of lower Highs and lower Lows is first broken by a higher High? This is a gray area - see Large Corrections below.
Large Corrections
A large correction occurs when price falls below the previous low (during a bull trend) or where price rises above the previous high (in a bear trend).For practical purposes, only accept large corrections as trend changes in the primary trend.
- A bull trend starts when price rallies above the previous high;
- A bull trend ends when price declines below the previous low;
- A bear trend starts at the end of a bull trend (and vice versa).
