Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Primary Downtrend

What it is:

When financial assets and markets -- as with the broader economy -- fall steadily for an extended period of time, it is known as a primary downtrend, or "bear market."

How it works (Example):

A primary downtrend is when each successive decline of the primary trend carries the market to lower lows and lower highs, lasting from several months to several years. This is illustrated in Figure 1 below.

As you can see in the Figure 1, High 5 is lower than the previous high and Low 4 is lower than the previous low.

Within a primary downtrend, several secondary reactions may occur against the trend, lasting for a few days, weeks or even months, but they don't necessarily change the definition of the overall trend. These movements are considered micro trends, such as daily movements and other short-term price fluctuations.

In the stock market, for example, prices may rise precipitously, even during a powerful downtrend, for several weeks at a time. This is known as a "rally."

If a rally doesn’t succeed in breaking through the previous high and the market subsequently declines to fall below a previous low, the price movement is still considered a primary downtrend.

Why it Matters:

It is difficult for investors to precisely time primary downtrends. That's because markets often rise higher than most investors and analysts anticipate -- and sometimes fall lower than they could possibly fathom.

In nearly every case, investing in assets or markets that are in a primary downtrend is not something you want to do. It is wise to wait until a primary uptrend emerges in the asset or market before you consider buying shares.

[Learn about four industry trends that could define 2011 and beyond by reading: 4 Powerful Industry Trends to Exploit in 2011]

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...