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There are three kinds of trends: short, intermediate, and long term. This veteran trader and analyst explains how you can spot them and use them.

Technical analysis assumes that all the knowledge, hopes, and fears of both active and inactive market participants are reflected in one thing: the price. Even if I am in a cash position, I am still influencing the price because it would be higher if my cash were invested. Thus, prices are determined by Bull market 9-months -2 years

PRIMARY TREND

Approximately 4-years Bear market 9-months -2 years psychology. This would just be an interesting observation, except that psychology moves in trends, and so do prices.

Most of the technical tools we use are aimed at identifying trend reversals at an early stage. We ride on trends until the weight of the evidence shows or proves that the trend has reversed — in this case, the number of reliable technical indicators all pointing in the same direction. Hence, the greater the number of indicators signaling a reversal, the greater the probability that a reversal will take place. It is important to remember that technical analysis only deals in probabilities, never certainties. Unfortunately, there is no known method of forecasting the duration and magnitude of a trend with any degree of consistency. Identifying reversals is hard enough. What is a trend? How long do they last? Before the advent of intraday charts, there were three generally accepted durations — primary, intermediate, and short-term.

The main or primary trend (Figure 1) is often referred to as a bull or bear market. Bulls go up and bears go down. Typically, they last from about nine months to two years, while the bear market troughs are separated by just under four years. These trends revolve around the business cycle and tend to repeat. This is true whether the weak phase of the cycle is an actual recession or there is no recession or growth.

A fourth category, the secular trend, embraces several primary trends and lasts between 10 and 25 years. An example using US bond yields between the 1930s and the 1990s can be seen in Figure 2.

Primary trends are not straight-line affairs, but consist of a series of rallies and reactions. Those rallies and reactions are known as intermediate trends and are represented in Figure 3 by the solid blue line. They can vary in length from as little as six weeks to as much as nine months — the length of a very short primary trend. Intermediate trends typically develop as a result of changing perceptions concerning economic, financial, or political events.

It is important to have some understanding about the direction of the main or primary trend. This is because rallies in bull markets are strong and reactions weak, as shown in Figure 3. On the other hand, bear market reactions are strong while rallies are short, sharp, and generally unpredictable. If you have a fix on the underlying primary trend, then you will be better prepared for the nature of the intermediate rallies and reactions that will unfold.

Classic technical theory holds that each bull market contains three intermediate cycles, as does each primary bear market (Figure 4). I would use this only as a guide, since many primary trends are not easily classified this way. Thus, if you are waiting for that third intermediate cycle in a bull market, it may never materialize.

In turn, intermediate trends can be broken down into shortterm trends that last from as little as two weeks to as much as five or six weeks. They can be seen in Figure 5, represented by the dashed red lines.