Continued from...Trading Volume and Direction of Stock Market Averages
Before resuming the historical demonstration of
the effectiveness of the stock market barometer which has been the subject
of our most recent discussions, there is a good opportunity here for some
consideration of the secondary swing. Previous discussions have shown how
it was possible successfully to diagnose a major swing in its incipient
stages. But the secondary movement postulated in Dow's Theory is a different
matter. We have proved by analysis the correctness of the theory
of the market as containing three distinct and, in a way, simultaneous
movements - the great primary swing up or down; the secondary movement,
represented by reactions in a bull market and corresponding rallies in
a bear market; and the daily fluctuation. It may be that this discussion
will seem to be addressed more to the speculator or embryo investor than
to those who consider using the stock market barometer as a guide and warning
How to Call the TurnIt may be conceded at once that if it is hard to call the turn of a great bear or bull market it is still harder to say when a secondary movement is due, although there are no insuperable difficulties in the way of showing the termination of the secondary movement and the resumption of the main market trend. We cannot dogmatize about the depth of such movements, in duration or extent. We have seen, from a study of what was really a secondary reaction in a bull market aggravated by the San Francisco calamity in 1906, that such a reaction can look deceptively like the real thing - the development of a new major swing. It can look so vigorous and convincing, as in the case of the Northern Pacific panic of 1901, that even experienced traders will rarely assume that the bull market is over.
Dow estimated the length of a counter movement
at from forty to sixty days, but subsequent experience has shown that this
longer range is exceedingly rare and that the duration may be appreciably
less than forty days. The daily fluctuation might be so considerable as
to constitute almost a secondary reaction in itself, if the extent of it
were all we were considering. When it was known that the government would
take over the railroads, at the end of December, 1917, there was an advance
in a single day in the railroad average of over six points. There have
been true secondary movements which did not carry even so far as this.
It is a tried rule, which will help to guide us in studying the secondary
movement, that the change in the broad general direction of the market
is abrupt, while the resumption of the major movement is appreciably slower.
The latter is frequently foretold by a line of accumulation in a bull market
or a line of distribution in a bear market.
More Meteors Than StarsWho is to foresee the sharp break? It seems to depend upon a set of causes altogether different from the adjustment of prices to values, which is the main function and intent of the major swing. It represents a technical market condition more than a summing up and reflection of general knowledge. It means, as the professionals say, that there is too much company on the bull side; or, conversely, that people are selling a bear market short, regardless of the diminishing floating supply of stocks. I have declined in more than one place to advise any man to speculate. That virtuous attitude is easy and cheap, but it will acquire more significance if I do not presume to advise against speculating where a free American citizen feels he has the qualities necessary for success and, more particularly, if he is the kind of man who can stand success. That is the severest of all tests, in other places than Wall Street. There have been many meteors in the financial sky, but few fixed stars.
In the secondary movement of the market the professional has a real and abiding advantage over the amateur. It is an emergency in which his technical experience tells. "Tape reading" is a sort of sixth sense, and the man on the floor can feel a change coming even better than the most accomplished tape reader if he has real aptitude for his work. There are some games in which the amateur is better than the professional. There are many in which he seems at least as good. But in the long run, in nearly all games, the professional will win oftener than the amateur. He will win more when there is anything considerable at stake and he will lose less when losses are inevitable.
From The Stock Market Barometer by William P. Hamilton, published in 1922
|Nature and Uses of Secondary Swings||The Advantage of Wall Street Professionals||Short Selling and the Secondary Movement|