1. Based on historical observations, Hamilton estimates that secondary movements typically regress between 1/3 and 2/3 of the main movement, most commonly 50%.

In the example above, the secondary trend that appeared in early 1997 retraced about 42% of the main move. (7158 - 5170 = 1988; 7158 - 6316 = 842, 842/1988 = 42.35%).

2. Hamilton noted that the secondary trend usually happens faster and steeper than the previous main trend.

Taking the example above, we will have a more visual comparison: The main trend increased by 38% (1988/5170 = 38%) and lasted from July 1996 to March 1997, around 8. months. The secondary trend saw a correction of 11.7% (842/7158 = 11.7%) and lasted for only 5 weeks.

3. At the end of the secondary trend, the market is usually very dull.

This period is often marked by small price movements, a drop in volume, or a combination of the two. Let's look at the example below


From April 7 to 10, the market is very dull, you can observe the red horizontal line on the volume indicator. This is the time when the least volatility in price and volume has been since the decline started. After that, DJIA ($ INDU) created a gap-down with a spike in trading volume. After creating a bearish gap, a reversal candle appears, after which the DJIA continues to create a gap-up (price gap up) and break out, accompanied by an increase in volume (green line). on the volume indicator). A strong rally, combined with an increase in volume, indicates that the secondary trend is over and the main trend is back again.

4. The bottom is usually accompanied by a high-volume wash-out session.

Take a look at the example below. The September and October 1998 lows were accompanied by record-high trading volumes. The bottom set on September 1 saw the highest volume ever recorded and the bottom set on October 8 recorded the second-highest volume ever. While these high-volume lows aren't a signal, they do provide traders with the necessary information. The DJIA Index ($ INDU) has risen from under 8,000 to over 11,000 in less than a year. Further confirmation of the end of the secondary trend.


Note:
  • Wash-out session (also known as "Shaking" is a session where investors panic, mass sell-off causes the market to drop sharply, but after this session, the market usually goes up very strongly.
  • There is still debate over whether the 1998 market crash was a Bear market or just a secondary move of a bull market. In retrospect, it seemed to be just a secondary trend although the DJIA has fallen sharply this time around.
Hamilton says that the secondary trend is a necessary "phenomenon" to combat excessive speculation. Corrective moves in a bull market and a rebound in a bear market have kept early activity under control and brought market health. Because of the complex nature of the secondary trend, traders need to study and analyze it more carefully.