In the market, in either crypto, stocks, indexes or bonds, a rally refers to a period of a continuous price increase. As such, it describes a period of increasing prices. Rallies occur due to different reasons.
The crypto market is volatile and is known for its constant fluctuations. Even seasoned analyst finds it hard to predict the direction of the market. Crypto prices can go down suddenly after a long period of increase. Additionally, the market may experience a sudden increase in stock prices after a long-term downward trend.
All bear markets come to an end, but the question in every trader's mind is, "when"?
Therefore, it is easy to want to believe that any market-wide reversal could be the signal for the next bull run. Oftentimes, you are mistaken. It is just a bear market rally.
Definition of a Bear Market Rally
A bear market rally is a sharp, short-term rebound in asset prices amid a longer-term market decline.
In most cases, the increase is usually between 10% and 20%, which starts suddenly but does not last long.
There are two main bear market rallies:
Short-term bear market rally- This usually lasts from half a day to two days. Additionally, it happens when the market experiences several lows within a week or a month.
Intermediate-term bear market rally- This happens when the market experiences multiple bounces or short-term rallies.
Bear market rallies can be disastrous for traders/investors who mistakenly believe they mark the end of an extended downturn.
What Causes a Bear Market Rally?
Bullish sentiments mainly cause bear market rallies by some risk-tolerant investors. After the prices have fallen for a while and the panic selling subsides, risk-tolerant investors may buy back, hoping for a low-cost entry.
This influx of buy orders can drive the prices up for a few days or weeks, but if the momentum isn't sustainable, market-wide concerns start again, and most people start selling off to avoid additional losses. This often kickstarts another wave of bearish runs.
Identifying a Bear Market Rally and Benefiting from it
A bear market rally is usually identifiable by its failure to reassert price back above downtrend lines. Another confirming factor most times is diminishing volume as the upward move unfolds.
Since most bear markets include multiple significant rallies, an active trader who timed these rallies perfectly could stand to make a pretty penny. Timing these rallies can be challenging and require a lot of analysis.
An easier alternative for average investors is Dollar cost averaging (DCA). This is the best way to lower the cost basis and set oneself up for success once the market eventually turns around.
Final Thoughts
Investors and traders who focus on the fundamentals can expect, and even profit from, bear-market rallies without assuming the next bull run is at hand. Focus on the fundamentals, keep improving yourself to spot the next bear rally, and position yourself to benefit.
Kommentare