Relief Rally
Candlefocus EditorRelief rallies are usually triggered due to some piece of good news, such as a positive change in corporate sentiment, an upward revision of earnings forecast, or an increase in a stock’s dividend. This good news that triggers the relief rally may be even small, but enough to create a sense of optimism in investors, who then push stock prices up as they move to buy stocks. The relief rally is further strengthened by the fact that, during such a bearish market, many investors tend to be short-sellers. That is, they sell stocks they don’t own in the hope of buying them back later at lower prices. When the news that triggers the relief rally is released, short-sellers will begin to buy back the stocks they had sold, in an effort to limit their losses from further decline in prices. This buying activity adds to the already-present optimism among other investors, and contributes to the relief rally.
Relief rallies are usually short-lived, and it is impossible to predict how long the rally will continue. The positive sentiment that created the rally can easily fade, and the prices of the securities could start returning to their long-term bearish trend in no time. Relief rallies can be useful for traders and investors who are brave and quick enough—such as those who do short-term/day-trading—to catch the wave, as they can potentially generate profits. However, it is also important to remember that relief rallies, by definition, are only temporary and it’s not worth investing your entire portfolio in them.