Bear Market Rally Definition & Chart Example

Bear Market Rally Definition

A bear market rally is a sharp move up in the context of a larger bear market.  Bear market rallies will show themselves after a strong washout sale has occurred.  It is much easier to define a bear market rallies in terms of the larger indices versus individual stocks.  This is because larger indices have been tracked for many decades and these bear markets have been documented.  For the major U.S. indices, a bear market is defined as a move of 20% or more down in a two-month period or greater.  While many bears love to focus on the move from the ultimate high to low, there is one part they consistently leave out and that is bear market rallies.  Bear market rallies will easily produce moves of 20% or more in a matter of weeks.  Normally these types of moves are not possible in the major indices, but the volatility that causes sharp moves down now provide the demand to create violent upswings.  

How to Identify a Bear Market Rally

There are a number of methods for identifying a bear market rally.  Below are some clear red flags:

1. The market should have a minimum sell off of 20% from high to low going into the short-term bottom
2. Volume increase of 300% or more on the day of the suspected bottom
3. Significant price reversal on the day of the low that should create the appearance of a massive hammer candlestick
4. The market begins to rally just as swiftly as it sold off in the coming days
5. After a move up of 20% to 35% off the bottom, the market begins to stall out
6. After a number of flat days, the market begins to sell off again and resumes the primary down trend

Trading a Bear Market Rally

Trading a bear market rally requires little skill and is nothing more than the resolve to take on a long position.  Technical analysis is completely out the window, because every indicator will be oversold and there will be no technical reason for the market to bounce.  Fundamentals will look just as bleak and provide no real indication of why the market should be bought.   All a trader needs to do is wait for the market to sell off 25% to 35% and look for a wash out day.  The next step is to commit to buying the market with the understanding that you might have to sit through a few days of pain, but at some point the market will reverse. 

Bear Market Rally Chart Example

Below is an example of a bear market rally in the Dow Jones from 2002.