Shortening of the time requirement for secondary reactions
As a reminder, I have been writing about capitulation
in the following posts.
As I explained in the past, “capitulation” is a mean
reversing tool. When markets get severely oversold, we derogate from trend
following, and bet for a trend reversal. The track record of the “capitulation”
indicator is outstanding. It works.
However, “capitulation” is not just a tool to signal
the opening of a partial long commitment, it also serves to shorten the time requirement needed to declare the
existence of a secondary reaction. Of course, if capitulation serves to shorten
the time requirement for a secondary reaction indirectly it serves to set up
stocks for a primary bull market signal. As we know, for a primary bull market
signal to exist, we need first to get a secondary reaction (and thereafter, a
pullback and subsequent breakout). Thus, capitulation not only implies the
opening of a partial long position at the very moment it is signaled, but also
“eases” the requirements for a primary bull market signal by shortening the
time requirement.
Schannep in his newsletter to subscribers of November
1st, 2008, shortened the time requirement for a secondary reaction
to just 1 week following capitulation. In other words, following the last lows after or at
capitulation, just ONE week of a rally exceeding 3% (confirmed by at least two
indices) will suffice to declare a secondary reaction.
It is good to recall Schannep’s requirements for a “normal”
secondary reaction in order to derive the specific rules for the “shortened”
secondary reaction.
Here are the rules for a “normal” secondary reaction:
A secondary reaction which interrupts the primary
trend must last a minimum 10 calendar days on 2 of the 3 indices with at least
8 trading days as the average of all three indices (Dow Jones Industrials,
Transports, and the S&P500)
Hence, if we halve the time requirement. We could
rewrite the rules for a shortened secondary reaction as follows:
A secondary reaction which interrupts the primary
trend must last a minimum 5 calendar
days on 2 of the 3 indices with at
least 4 trading days as the average of all three indices (Dow Jones
Industrials, Transports, and the S&P500).
This is why, after the capitulation event of December
24th, 2018, I was looking for a secondary reaction as soon as we had
had a rally lasting four trading days, as was explained here
All in all, capitulation not only prompt us to act by
opening a partial long commitment, but also serves us to shorten the time requirement
for a secondary reaction which results in full primary bull market signals
being signaled earlier.
Sincerely,
The Dow Theorist
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