What is a Major Downtrend?
A major downtrend, or bear market, is when financial assets and markets -- as with the broader economy -- fall steadily for an extended period of time.
How Does a Major Downtrend Work?
A major 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 major 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 major downtrend.
Why Does a Major Downtrend Matter?
It is difficult for investors to precisely time major downtrends. That's because markets often rise higher than most investors and analysts anticipate -- and sometimes fall lower than they could possibly fathom.
[Learn about four industry trends that could define 2011 and beyond by reading: 4 Powerful Industry Trends to Exploit in 2011]