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Posted on 8 March 2011 | 3,447 views

Bear Market Rallies During Market Crashes

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.

So, How Do You Identify a Bear Market Rally?

There are a number of methods for identifying a bear market rally and 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

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