Saturday, May 16, 2009

Bear Market Rally or Trend Change?

How to differentiate a Bear Market Rally from a Potential Trend Change?

Rally traders reaped considerable profits. Investors lost even more money. Understanding the differences in rallies is important if we want to keep our money, or make it grow in the market. There are three types of rally situation:
  1. A rally in a downtrend
  2. A rally in a trading or consolidation band
  3. A rally that is a precursor to a significant change in the trend.

The first step, which is surprisingly ignored by many traders and investors, is to determine if we are in a bear market. After the battering of 2008, it is comforting to believe we are entering a market recovery so we naturally look for all the evidence that supports this view and conveniently ignore evidence that points in the other direction. This is a dangerous approach to take in any market condition.

  • Many new up trends start with a rally, but not all rallies go on to develop into a new up trend.
  • A rally is a rapid and substantial change in the direction of the existing downtrend.
  • If this burst of buying enthusiasm is supported by long term investors then the rally has a chance of becoming part of a new up trend. If the rally fails to gain support – if investors ignore it – then the rally collapses and the previous trend resumes.
  • In a down trend, a collapsed rally means the down trend remains in place. In an up trend, the collapse of a rally is usually associated with a bubble trading environment. The collapse takes prices down to the underlying up trend.
  • Traders are attracted to rallies because of their potential to signal the start of a new up trend.
  • Trade a rally as a trend, and you lose money. Trade a rally as a rally when in fact it is the start of a new trend, and you fail to maximize the profit available.
  • There is an ongoing challenge to find tools which separate a rally from a trend change as early as possible. Quick recognition and identification is important and the Guppy Multiple Moving Average is a very useful tool for this task.

Above extracted from an article written by Daryl Guppy this week.

Is Singapore Stock Market in Bear Market Rally or Trend Change?

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