How To Spot A Relief Rally In Stocks And Stock Markets

Because bear markets last for long periods of time, they can exact an emotional drain on investors hoping for a market turnaround—hence the “relief” when signs of a bounce appear. Market advisors warn against emotional quebex responses to market volatility, as investors may panic and make judgment errors regarding their holdings. I suspect the next relief rally will be exceptionally strong and will catch the bears by surprise.

Much of the time, such a rally can last for quite a long time or even months before the continuation of a longer-term descending trend. The chart below shows the technical indicators for the Nasdaq Composite remain “very mixed but slightly in favor of the bears for now,” said Richey. The RSI is the only indicator favoring the bulls as it has offered a degree of confirmation for the recent stabilization in the Nasdaq. However, the blue line in the middle sub-chart, which shows the Nasdaq’s relative strength to the S&P 500, continued to drift lower, supporting the bear case for the months ahead, according to Sevens Report Research. “Whether or not such a relief rally is able to break beyond the August downtrend line will be critical for the near term trend in stocks as a failure would leave the path of least resistance lower,” he wrote.

After stocks sell off and make a new low, some buyers come back in and provide support for a few days, sometimes a few weeks. That’s a relief rally and it’s usually identifiable by its failure to reassert price back above downtrend lines. A confirming factor (sometimes) is the diminishing of volume as the upward move unfolds. At Successful Portfolio Strategy, we analyze risks and opportunities on different time horizons on both a strategic and tactical basis. Sharp relief energizes that happen in any case bearish markets are some of the time called a dead cat bounce or sucker’s rally. This type of rally might fool some into thinking there is a reversal in the trend, just to find the bear market continuing before long.

Understanding a Rally

This type of rally may fool some into thinking there is a reversal in the trend, only to find the bear market continuing soon after. Market participants price in a wide range of types of events, for example, the release of a company’s quarterly earnings report, election results, interest rate changes, and new industry regulations. Any of these events can trigger a relief rally when the news isn’t generally so terrible true to form. Relief rallies occur in various asset classes like stocks, bonds, and commodities.

A rally may be contrasted with a correction or market crash, which is a rapid or substantial downward move in short-term prices. The set up for a relief rally is in place for the Nasdaq Composite, with a run at 14,000 possible in the very near term, said Richey. However, that upside target would ultimately begin to act as price resistance in the event it is reached in the early fall, he said. Traditionally, the RSI is considered overbought when above 70 and oversold when below 30. Have you ever wondered what a relief rally is and what conditions can trigger it? In this blog post, we will dive into the exciting world of finance and explore the concept of a relief rally.

You can use technical analysis to find these stocks, or you can even screen for them using fundamental criteria. The best way to take advantage of relief rallies is to be patient and wait for the market to show some signs of stabilization. In this short tutorial, we will discuss what relief rallies are, why they are important, and how you can find them in ThinkOrSwim using some simple thinkScript code. However, a relief rally can provide an opportunity for savvy investors to make some good profits. If CPI figures released on September 13th turn out soft – and I personally expect that they will – then the bullish inflation narrative will gain further momentum for at least several weeks. One sector which has shown signs of a significant slowdown is the housing sector.

1. These three sets of technical factors – holding support, oversold conditions, breaking out above resistance – contribute to a bullish set-up from a technical perspective.
2. This rally generally happens when there is positive news following a period of negative sentiment or market downturn, leading to increased investor confidence and a boost in trading activities.
3. In addition, technical analysis tools, like moving averages or trend analysis, can also be helpful.
4. Sometimes, even a lower-than-expected loss can ignite a relief rally, or they might be triggered by a more positive tone on a company conference call with analysts.
5. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.

Longer term rallies are typically the outcome of events with a longer-term impact such as changes in government tax or fiscal policy, business regulation, or interest rates. Economic data announcements that signal positive changes in business and economic cycles also have a longer lasting impact that may cause shifts in investment capital from one sector to another. For example, a significant lowering of interest rates may cause investors to shift from fixed income instruments to equities. Historical data shows that there is a lack of strong daily relief rallies in the stock market recently, but this may be due to a combination of factors. A bear market is commonly defined as a stock market decline of 20% or more. At some point during the downturn, an orderly retreat typically turns into high-volume panic selling.

Relief rallies in these very bearish markets are sometimes called a dead-cat bounce. This type of relief rally happens when there’s a temporary recovery from a bear market or lengthy decline, but then the downtrend continues later. A Relief Rally is an important business/finance term as it denotes a significant increase in market prices that occurs after a period of decline or uncertainty. This rally generally happens when there is positive news following a period of negative sentiment or market downturn, leading to increased investor confidence and a boost in trading activities.

Understanding a Bear Market Rally

We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. The key with relief rallies is to have a plan for your trade, and trade that plan. Therefore, there is gathering evidence to support activtrades forex a bullish narrative on the evolution of inflation. On Monday, the yield on the 2-year Treasury declined less than 1 basis point to 5.048% from 5.054% on Friday, while the yield on the 10-year was down 2.9 basis points, at 4.210%, according to FactSet data.

Bear market rallies are treacherous for investors who mistakenly come to believe they mark the end of an extended downturn. As the primary bearish trend reasserts itself, the disappointment of those who bought during a bear market rally helps to drive prices to new lows. Some of the time, even a lower-than-expected loss can touch off a relief rally, or they may be triggered by a more positive tone on a company conference call with analysts. Part of the explanation is that somewhat uplifting news once in a while makes short sellers buy stock to cover their positions, which can trigger a short covering. This is finished as short-sellers hope to stay away from additional losses as prices rise. A relief rally is a reprieve from a more extensive market sell-off that outcomes in briefly higher securities prices.

He has also served as Global Portfolio Strategist and Head of International Investments for an investment bank. He is currently managing JK Investment Consulting, a firm specializing in global portfolio strategy, macro forecasting, and quant analytics. Numerous other sentiment and positioning indicators have signaled that the US equity market reached negative extremes, from a behavioral perspective. One such indicator, the National Association of Active Investment Managers (NAAIM) Exposure Index, fell to a reading of 27.33, which ranks in the 9th percentile (8.7%) since the inception of the indicator in 2007. Declines large enough to qualify as bear markets often take place as a result of deteriorating fundamentals, whether the ultimate cause is a housing market crash, a pandemic, or merely a recession.

In the aftermath of the Stock Market Crash of 1929, the Dow Jones Industrial Average went on to rebound 48% from mid-November through mid-April of 1930. From there, the Dow declined 86% by the time the bear market hit rock bottom in 1932. Since bear markets last for long periods of time, they can correct an emotional drain on investors expecting a market circle back — consequently the “relief” when indications of a bounce show up. Market advisors caution against emotional reactions to market volatility, as investors might panic and make judgment errors with respect to their holdings. The term “rally” is used loosely when referring to upward swings in markets. The duration of a rally is what varies from one extreme to another, and is relative depending on the time frame used when analyzing markets.

These pullbacks are seen as a contrast to the artificial intelligence-driven rally earlier this year when the Nasdaq had its best first-half performance since 1983. This indicator makes it easy to spot when we’ve been in a similar position previously in history.

These three sets of technical factors – holding support, oversold conditions, breaking out above resistance – contribute to a bullish set-up from a technical perspective. As these risk-tolerant buyers acquire stocks from the risk-averse sellers getting out at new lows, a relief rally often follows, lasting from a few days to several months. Technical analysis and behavioral analysis are two of seven different types of factors that we incorporate into our tactical outlook in Successful Portfolio Strategy. These two factors have converged to create a propitious set-up for a significant relief rally in US equities. The deepest bear markets have in the past produced the biggest bear market rallies.

Meaning of rally in English

On the one hand, growth in economic activity has clearly been moderating from red-hot levels. However, on the other hand, all of these indicators are currently registering positive growth and, taken as a whole, they are not at all indicating recessionary conditions in the US economy. All of these indicators of economic activity are, therefore, currently supportive of a “soft landing” narrative. Because bear markets tend to be prolonged, they can generate multiple selling exhaustions that temporarily improve the market’s fortunes without altering the fundamental factors causing the downturn.

What is Relief Rally

A bear market relief rally is a short-term increase (or rally) in stock prices that occurs during a prolonged period of decline (aka bear market). Market participants price in many different types of events, such as the release of a company’s quarterly earnings dowmarkets report, election results, interest rate changes, and new industry regulations. Any of these events can trigger a relief rally when the news is not as bad as expected. Relief rallies happen in many different asset classes such as stocks, bonds, and commodities.

Related Finance Terms

This type of price movement can happen during either a bull or a bear market, when it is known as either a bull market rally or a bear market rally, respectively. However, a rally will typically follow a period of flat or declining prices. A relief rally provides temporary respite for investors who have been weathering the storm of a downturn. However, it’s important to note that a relief rally is typically short-lived and does not necessarily indicate a long-term trend reversal. We should note that at Successful Portfolio Strategy, as part of our disciplined process, our tactical outlook is developed on the basis of eight main factors.