This article is devote to a discussion of broad market movements's of common stock prices. It examines three of the interesting long-term stock market cycle theories: the Dow Theory, the Elliot Wave, and the Kondratieff Cycle. It then looks at some of the indicators, such as moving averages, the advance/decline index and odd lot trading, that are used to identify shorter-term market trends.
The Dow Theory
Charles H. Dow was one of the first technical analysts. He was the creator of the Dow Jones Industrial and Railroad averages and was the first editor of the Wall Street Journal. As a journalist, he wrote a column that was frequently aimed at interpreting movements in the market averages. This is perhaps the best-known theory of stock market price behavior today and has many supporters.
According to the Dow Theory, there are three movements occurring in the market simultaneously: a primary, secondary and tertiary trend. The primary trend determines the longer-term direction of the market. This major trend goes through complete cycle about every four years, but the length may vary from two to ten years. The cycle is divided into an upward trend, or bull market (average duration about two and a half years). An upward trend is recognized as a series of cycles with highs and higher lows over time. A secondary trend is a significant move in opposition to the primary trend, retracing one- or two-thirds of the most recent price change. This is then followed by a continuation of the primary trend. The third type of trend identified by Dow, the so-called tertiary trend, refers to price movements over the very short term, such as over a matter of days. These movements are considered of little significance. The Dow Theory is always applied to the Dow Jones Industrial and Transportation averages. A key assumption is that any primary or secondary trend must be reflected in both of these stock averages in order to be confirmed.
One author made this comment on the Dow theory: "There are three principal phases of a bear market: the first represents the abandonment of the hopes upon which stocks were purchased at inflated prices; the second reflects selling of sound securities, regardless of their value, by those who must find a cash market for at lease a portion of their assets.
"There are three phases of a bull period: the first is represented by reviving confidence in the future of business; the second is the response of stock prices to the known improvement in corporation earnings: and the third is the period when speculation is rampant and inflation apparent - a period when stocks are advanced on hopes and expectations."
Elliott wave principle
The Elliott Wave Theory was developed by a retired accountant, R. N. Elliot, in 1938. It is similar to the Dow Theory in that it traces out broad market movements as measured by the Dow Average. A bull market is presumed to have five major movements: three in the direction of the trend and two against the trend. A bear market has three major movements: two in the direction of the trend and one against the trend.
In addition to these major movements, Elliott postulated many other waves of lesser degree which occurred simultaneously with the major trend. In this respect, his theory is mechanically more complex than the Dow Theory.
Some analysts have attempted to use the Elliott Wave Theory as a supplement to the Dow Theory. However, this method is frequently criticized for its inability to provide specific trading rules and for its frequent failure to explain market moves.
Kondratieff Cycle
In the 1920s, a Russian economist, Nicholas Kondratieff, came to the conclusion that the western economies experienced recurring cycles every 50-54 years. These cycles, usually attributed to swings in the demand for capital goods, had four phases: strong growth; a short primary recession or plateau; stagnation; and a secondary depression. This cycle is of particular interest, since many analysts in the 1980s believe that the western economies are following their fourth consecutive cycle. Phase four of the preceding cycle culminated in the Great Crash of 1929 and the Great Depression, a little over 50 years ago.
