"Bear market rallies, or 'relief rallies,' are sharp upward spikes in prices on the US equity markets. They are fed by short covering. Those who are short, or have positions based on the assumption that the stock market is going lower, are forced to buy stocks either from fear of losses, or because they are undercapitalized and overleveraged. The leverage may be in terms of time (as in the case of stock options) or money (margin).
The bear market rally consists of a violent opening spike. That spike will be up to the nearest strong overhead resistance as the short sellers panic. Then the market will pull back, because there are no serious buyers yet to sustain the prices, and the early shorts have covered. Also, insiders will begin to feed their dog stocks into the public markets.
The prices will pull back to the nearest support. Once the bulls feel confident again, the buying will resume, this time more slowly as naive speculators begin to succumb to the 'good news.' The highwater mark of the opening price spike will be a definite target for this secondary move higher. Often the initial effort to find support fails, and the bullish sentiment will pull back and try to find stronger support from which to resume the price advance.
Very infrequently there is a 'failure to rally' and a failure to find support at a near support level. Buyers (also known as 'the greater fool') are not to be found, and the dip buyers panic, and a freefall ensues. This also can be quite breath-taking, as the insiders are selling not buying, and the small speculators are exhausted and starting to panic. This is an uncommon event, but can be quite damaging if you are caught on the wrong side of it. This is how we came up with the term 'chasing nickels on the freeway' to describe it. Buying the dip in price in bull markets is easy money; buying the dip in bear markets is for gamblers.
The best way for most traders to play these markets is to stay out. The opportunity to be whipsawed is very high. Take a break. Go for a walk. The market will always be there. The greed of 'lost profits' pulls you back in, and then fear will take you out, on a stretcher if you are not careful.
Controlling one's emotions in volatile markets is the primary challenge for experienced traders."
Jesse,
Bear Market Rallies, 17 July 2008
US markets will be closed on Monday for Memorial Day observance.
Stocks were in rally mode today, what looked like a proper bear market rally.
Considering we have seven weeks of weakness and declines as we *finally* set that second low we have to say that it's about time.
Now let's see if bully can keep the squeeze going, or not.
With the general risk on atmosphere, the Dollar and VIX were lower.
The VIX is now back down to its 50 DMA which has marked a support level in the recent past.
Gold and silver were trying to break out this morning, but were smacked down lower in the general exuberance.
Next week may be pivotal.
For the rest of the world, try to carry on with US guidance on Monday.
Have a pleasant weekend.
