As opposed to correction or market crash, a rally is a series of rapid price increases that happens for a fairly short period of time. This uptrend may have a short-term or continuous effect on the market, as well as happen within a larger movement, e.g. bull or bear market (see bull market rally and bear market rally correspondingly).
- A rally is a sharp positive price move in the market of stocks, bonds or other financial assets.
- A rally can be caused by various economic factors, sometimes in a bear or bull market situation.
- When a rally is seen, it usually means that some positive change in the economic policy has created attractive investment opportunities for the near future.
Understanding a Rally
The word “Rally” has somewhat wide usage in the world of financial trading, and its nature depends on the time frame an analyst is looking at. While typical traders could think of the first hours of a day, where prices are generally fluctuating and hitting new peaks, portfolio managers evaluating investment strategy could take a calendar quarter a rally, even if that was a part of a bigger-size downtrend in a given period of time. In other words, any rising in between two extremes can be called a rally, which is always relative to a broader range of data.
The driving force of a rally is a large flow of capital into the market that stimulates the demand for the stocks. The sellers react by bidding up prices to an extent determined by the market depth and the level of selling pressure. To explain, in case of significant imbalance between supply and demand with a large buying pool and few sellers, a big market rally with huge price swings should be expected. It will be shorter and lower in price moves in case the same amount of investors wanting to buy find a similar amount of sellers.
There are various technical indicators that can help traders to spot a rally when looking at charts. Based on the price deviations from its average values, oscillators begin to signal about overbought conditions. Trend indicators display upward price shifts. The price behavior is defined by the price making higher highs with high trading volumes and higher lows with low volumes. With such extreme increases, the price approaches and goes past its resistance levels.
Underlying causes of Rallies
A rally can happen for a number of reasons. A small rally may be the consequence of an encouraging news or event that affects the supply and demand balance. Sometimes it happens around increased buying activity forced by operations of a large fund in the market, or product launches of giant companies. Perhaps, Apple Inc. would be the best example, as its announcements tend to create rallies that last for months.
Larger rallies are brought by events with more profound and long-lasting impact on the economy, such as changes in countries’ fiscal policies, interest rates or regulations for business owners. Positive news about the economic playground for businesses also trigger capital shifts between financial sectors. It is common to see an equity market rally after a decrease of interest rates, as traders are attracted to sell their fixed-income securities and choose to invest into something that brings returns.
Bear market Rallies
Rising prices can be found even within a larger price downstream – bear market. Some rallies reverse the course of the price instantly, bringing the trend back to the downward movement. Such price moves are called sucker rallies and they are attributed their own specific features. They take place in all segments of financial markets can be based on bear social reactions rather than actual capital influx or shifts.
Such kind of rallies are easy to recognize in the context of a bigger timeline, but may look deceiving for inexperienced traders at the time of decision making. The thing is that any downtrend will end in most cases but it can be hard to judge what uptrend will indicate a sustainable change of the price movement.