What is a rally?
A rally is a general term used in financial markets for a sustained price rise. Classically, a rally would have been seen as a rebound in price following a previous move lower. However, the term is used far more broadly now to cover a broad price rise. A rally can last from as short as a few minutes for an intraday trader, to several months or even years for longer-term traders.
A rally is seen as being the opposite of a “correction”. However, unlike the correction, there are no defined limits to how far prices move to be defined as a rally.
Beware the bear market rally
Rallies are positive moves in the price. However, not all rallies should be seen as outright positive, and some need to be treated with caution. Bear market rallies are moves that pull prices higher in a bear market. However, they are just retracement moves that unwind prices and renew downside potential. They can suck traders into believing that a sustainable change in market sentiment has taken hold. However, the rally then falters and renewed selling takes hold once more.
Technical indicators for a rally
Several technical analysis patterns and signals can signal the beginning of a rally:
- Hammer candlestick
- Inverted Hammer candlestick
- Bullish Engulfing candlestick
- Morning Star candlestick
- Piercing Line candlestick
- Double Bottom
- Triple Bottom
- Inverted Head and shoulders (bottom)
Where a rally comes within an uptrending or bull market, these are price-extending moves. Here are a few ways that they can be measured:
- Uptrend channel – Sometimes when prices are running up within an uptrend (a string of higher lows), there can also be a line of higher highs which is also detectable. This forms an uptrend channe. The upper channel limit becomes a gauge of how far the rallies can reach.
- Fibonacci projections – Fibonacci analysis can be used to project how far rallies can move once breakouts have been achieved. Fibonacci Projections are a tool for calculating potential rally targets.
However, a bear market rally is likely to fall over and see selling pressure resuming. Here are a few techniques and studies that can indicate how far a bear rally within a downtrend might go:
- Downtrend – A near-term rally within a downtrend (bear market rally) is a rebound in the price that will tend to fizzle out around the downtrend.
- Moving Averages – In a downtrending market, falling moving averages can be used to gauge the strength of the trend. As such, falling moving averages can often limit bear rallies before renewed selling takes hold.
- Relative Strength Index – In a downtrend, the RSI indicator will tend to oscillate between 20 and 60. Rallies that unwind the RSI back towards 50 can help to renew the downside potential for the next bear leg.
- Fibonacci retracements – As markets rally following a sell-off, the move will often be just a retracement. Technical analysis traders use Fibonacci retracements to calculate important consolidations and potential failure points of rallies.
