Technical Analysis: Trends and Time Frames

Definition and Interaction of Trends

• A legitimate peak and trough is determined by a reaction to the prevailing trend, which should retrace between one-third and two-thirds of the previous move.
• If a retracement move is less than the minimum one-third, the peak or trough in question is considered suspect.

Peaks and Troughs

• Peaks and troughs are patterns developed by the price action of all securities.
• Prices never move in straight lines, whether in an uptrend or a downtrend.
• The term "zigzag pattern" is used to describe the peaks and troughs.

Technical Analysis

• Technical analysis is the art of identifying a trend reversal based on the weight of evidence.
• The "evidence" consists of scientifically derived indicators or techniques that work well most of the time in the trend-identification process.
• The "art" consists of combining these indicators into an overall picture and recognizing when that picture resembles a market peak or trough.

Trends

• There are three widely followed trends: Primary, Intermediate, and Short-term.
• Primary Trend:
  • Lasts between 9 months and 2 years.
  • Reflects investors' attitudes toward unfolding fundamentals in the business cycle.
  • Concerned with identifying reversals in the primary trend.
• Intermediate Trend:
  • Lasts anywhere from 6 weeks to 9 months.
  • Known as intermediate price movements.
  • Important for improving success rates in trading and determining when the primary movement may have run its course.
• Short-term Trend:
  • Lasts 3 to 6 weeks.
  • Interrupts the course of the intermediate cycle.
  • Influenced by random news events.
  • Far more difficult to identify than their intermediate or primary counterparts.

Market Cycle Model

• Long-term investors are concerned with the direction of the primary trend.
• Short-term traders are concerned with smaller movements in price, but need to know the direction of the intermediate and primary trends.
• The principle of "surprises occur in the direction of the main trend" applies.

Supplementary Trends

• Intraday Trend:
  • Applies equally to very short-term movements.
  • Reversals only have a very short-term implication and are not significant for longer-term price reversals.
  • Extremely short-term price movements are influenced by psychology and instant reaction to news events.
• Secular Trend (Super Cycle):
  • Lasts over 10 years, often as long as 25 years.
  • Consists of a number of primary trends.
  • A long wave that extends over a substantially greater period.