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In case of a larger bear market, a sharp move up the context is known as a bear market rally. While considering a bear market, a steady drop in the stock market over a period of time is termed as the bear market. With a this downward market, extensive pessimism in the stock market is observed and investors being highly de-motivated and selling off the shares is quite common.
How To Define Bear Market Rally
Generally, this type of rally is observed once the market sees a washout sale. In terms of larger indices and individual stocks, bear market rallies show moves of 20 percent or more over a period of a few weeks. The major indices generally never experience such moves. However demands for considerable upswings can result from a volatile market causing sharp moves down.
How Would You Identify A Bear Market Rally
When you are trying to successfully identify a bear market rally, there are some important factors to be considered. Let us look at those factors in brief.
Firstly, a minimum sell-off of 20 percent between the high and low, going in for the short term bottom, should be displayed by the market. Next, on the day corresponding to the ascertained bottom, at least 300 percent of increase in the volume should be noted for a bear market rally.
The day when the low is observed, a significant reversal of the price is required, resulting in a great hammer candlestick to appear. There should be a quick rally for the market just as the selling off for the next span of days. The market faces a stall-out after a move-up from 20 percent to 35 percent off the bottom. Following this, the market starts to sell-off once again, resuming the primary down-trend after a few flat days.
How To Trade In A Bear Market Rally
If you are prepared to wait for the long term results, trading in a bear market rally is for you. It does not demand high skills. With no specific technical reason for the market to bounce, technical analysis is out of the question. Every such indicator is bound to be oversold. There is no basic logic behind why the market should be bought, and thus fundamentals are not very important to be considered here.
Once the market gets sold-off at 25 percent to 35 percent and the wash out day is observed, a trader should commit to buying off with the knowledge on their mind that they may have to wait through a considerable period to reap the profits of their trading in the bear market rally.
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