In bear market we must turn thinking upside down in many respects. For example, a “reaction” now is an Up-move, because it is against the main trend.
After a decade and a half of mostly bull markets people have become accustomed to things of reactions as being sell-offs, dips falls. But a reaction is a move counter to the trend.
Every leg down in a bear market is interrupted by a secondary reaction, which may come in two or three phases, or little legs.
These reactions are lifesavers for those who failed to take action when the bull market ended and are now stuck with giant losses. The secondary reaction gives us a chance to “bail out” at higher prices. It also gives opportunity for shorting. Failure to sell out this rally means you risk “taking a bath” when the next leg of the bear market comes into play, at the end of the secondary reaction.
Of course, the possibility is ever present in any bear market that the rally will turn out to be a primary reversal. To diminish between a true secondary and primary reversal I can probably do no better than to turn to the words of Richard Russell.
“An understanding of secondary reaction” wrote Dow Theorist Robert Rhea, “is needed by traders to about the same extend as growing cotton crop requires sunshine.” Yet the secondary is probably the MOST perplexing phenomenon with which an average investor must content.
To begin with, let us define our terms. Readers are aware that the bull market leg swing is a broad upward movement of stocks, while bull market reaction is an important decline against the primary trend. However, since under the Dow Theory a bear is now in progress, one must reverse the terminology. In bear markets, the primary legs are downward, while the secondary reactions, or rallies, are upward movements against the prevailing primary trend.
“Secondary reactions,” wrote Rhea, “are necessary to the stock market as safety valves are to the steam boilers.” In other words, when the stock market steam engine is strained and too many passengers have climbed aboard, the safety valve (secondary reaction) is released. Although many reasons are given for every move of this kind, it may be said that secondaries serve the following purposes:
(1) To correct a primary market movement which has gone too far in one direction, and (2) to dampen the speculative ardor of the amateur trader.
Deceptive rallies…after dullness…Psychology of Reactions…A step-by-step Analysis…. The size of reactions…
If you would be successful “bear-back rider” know the sign of the secondary, the lifesaver in bear markets.
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