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What Is a Suckers Rally? 
There is a high percentage of individual investors and traders that have described their six-month outlook for the U.S. stock market as “bearish”! It’s just that simple…General market sentiment has spoken and it’s all over the charts! Just have a look at the highs on the S&P in early January when markets were sitting at $4803…Now look at the S&P 500! It has since done a consistent job of moving lower and lower. As of Friday's close, even with two sessions closing higher, we’re still 9% off of the Jan highs and are still positioned below the 200 SMA!. With that being said, the “optimistic bounce” we saw which started on Thursday and carried through into Fridays close, was still "well below normal levels."

So what was the rally about??? Simply put…It was a “suckers rally” or more appropriately, a bear rally!...I think! We'll have to wait and see what happens in the coming weeks! 

What Is a Suckers Rally? (Better Known as a Bear Rally)
A sucker rally describes a price increase that quickly reverses course to the downside. Sucker rallies often occur during a bear market, where rallies are short-lived. For example, The S&P has lost 10% of its value since early January. Price initially stepped down, creating a big bear flag which ended up playing out and moving to lower levels. Even though the markets were paring back gains and moving lower, price action did need to take small breaks to rally. Those small, insignificant rallies are what's referred to as a “suckers Rally” or a “bearish Rally” or a short term “ Relief Rally”. Despite what you want to call it, the facts are that price is still experiencing downward pressure and even though we just had two huge days of price action movement to the upside, it doesn’t change the prevailing trend since January 4th…bearish! Sucker rallies occur in all markets, and can also be unsupported (based on hype, not substance) rallies that are quickly reversed…This is what really needs to be taken into consideration. This might not be the time to “buy the dip”.

Understanding the Sucker Rally
Sucker rally is market slang referring to the temporary rise in an asset, like a stock, bond or some other asset of value, or the market as a whole, which continues just long enough to attract investment by naïve or unsuspecting buyers. The buyers are the suckers since they are likely to lose money on the trade when the price heads lower again. In most cases, the unsuspecting trader or investor that chooses to get long in the market at the wrong time is what's referred to as a “bag holder”. They are also part of the camp of people that don’t understand market direction or technical analysis. There is a dangerous lack of knowledge surrounding the “prevailing trend” as well. These participants essentially come into the market and take shit price action values off the hands of people that are selling based on legitimate concerns! This phenomenon is also known as a dead cat bounce, a bull trap, or a bear market rally. No matter what you want to call it, it’s a dangerous time to get long in the market…unless you have a timeline that is so far out it doesn't matter. Let's be honest, for short term traders, understanding the sentiment of the market is the MOST important part of the decision making process. That is one MAJOR piece of the equation that you can't screw up!
Sucker rallies frequently occur when the price of a stock noticeably rises despite the fact that the fundamental aspects of the stocks or the markets have not changed. In most cases, these fundamentally unsupported price increases result in a large drop, usually continuing an overall downward trend. If we look at where we’re at right now, there are a LOT of head winds that are making markets uncomfortable. There are larger Macro events that are bound to add weight to the investor community. There are credit cycle challenges at home that are going to put pressure on consumers (which will in turn have effects on future earnings if people stop spending as much). Point is, there are some big roadblocks we’re facing. Sidenote, I know there is another side to this conversation and that some people are going to disagree with that I’m writing but the truth is, and I think we can all agree on this point, there world is in a bit of a pickle…There is enough uncertainty out there that the markets might take a break from it’s long movement, wait to see what happens with the Ukraine, rates etc…and once the dust settles, the markets will then reassess.

Back to my principal point…Sucker rallies frequently occur amidst bear markets (we’re currently flirting with a technical correction -10% off the highs), where small price increases attract a few buyers but then the selling continues in large quantities. FACT: The volume that came in late last week was above average…with that said, the volume that has printed since early Jan has been geared towards the sell side. Simple fact!

Sucker rallies are easy to identify in hindsight, yet at the moment they are harder to see…unless you have a firm understanding of technical analysis. Which most people don't. As prices fall, more and more investors assume that the next rally will mean the end of the downtrend. Which is generally a miscalculated bet. Rallies are great, but not always significant. What I mean is if price rallies into a prior level and reverses back to the downside it’s more confirmation of what the general sentiment is…bearish! Eventually, the downtrend will end, but identifying which rally turns into an uptrend, and not a sucker rally, is not always easy….Again, unless you understand TA really well.




Identifying a Sucker Rally
Identifying a sucker rally can be challenging, even for experienced traders. Sucker rallies appear and disappear without warning, especially during a period of downward-trending market action, such as a bear market.
A bear market is typically indicated by a 20% drop in the stock market, and tends to occur when the market is overvalued. At the time of this blog being written NONE of the major indices are off more than 15%. The R2K is down roughly 15%, the Nasdaq is off a little of 14% and both the Dow and S&P have bounced back from correction territory. During a bear market, investor confidence tends to be low, and traders watch eagerly for signs of upward movement in the market. Inexperienced or panicking investors may be tempted by market upticks, making these investors especially vulnerable to the whims of a sucker rally. They want to buy because they don't want to miss out on any upside that may develop… Please don’t let FOMO dictate your trading decisions!

Prevalence of Sucker Rallies...
Rallies are common occurrences during bear markets. Just like the old saying goes…”what goes up, must come down”. Well, in a bear market of bearish move..” what goes down, must come up”. I honestly just made that saying up. But the reality is, no matter what side of the market you play, there are always counter moves! Notably, the Dow Jones Index experienced a three-month rally following the Stock Market Crash of 1929, although the overall bear market continued on a greater decline until bottoming out in 1932.1
Bear markets frequently spawn at least one rally of 5% or more, but then proceed lower, before the market begins an uptrend. On February 24th and 25th collectively we saw a 6.5% rally…with that said we’re still in a technical Bull Market…In the grand scheme of things though, bear markets can have at least one, and usually more, sucker rallies.

Because bear markets may last for long periods of time, they can exact an emotional drain on investors hoping for a market turnaround. Traders shouldn’t get too effected by the slide lower. Our job as traders is to take advantage of whatever market we’re given. Market advisors warn against emotional responses to market volatility, as investors may panic and make judgment errors regarding their holdings. Shit happens! Many experienced traders wait to see the price make a series of higher swing highs and higher swing lows before buying. The series of higher swing lows and highs helps identify that an uptrend may be underway and that the downtrend may be over.

Here is the bottom-line…and just something to make a note of!
Sucker rallies typically occur after a sharp decline. When prices fall significantly, it is hard for the price to immediately make new highs again. Investors are nervous, and their confidence is shaken, so when the price bounces astute investors and traders use it as a selling opportunity.
These bounces are called sucker rallies, since they are likely to be met with overwhelming selling relatively soon after they start.

Two sucker rallies occurred in 2018 after the S&P 500 witnessed a sharp decline of more than 11% in October. The S&P 500 then rallied almost 8%, but this was quickly met by more selling. The price then rallied more than 6% off the swing low, but again this was met by selling and a large drop in price…Just keep your eye open and you emotions in check. Apply your trading edge and manage your risk on every position!

Happy Trading!
Regards,
Julian Lewis





About Author: Julian Lewis

I have been trading for close to 10 years and have been a Trading Performance Coach for the last 7 years! Trading is not as difficult as you may think! We’ve been made to believe that only a small group of hyper intelligent mathematicians and rocket scientists can run Wall Street. That idea could NOT be further from the truth.
My goal is simple…I want to do two things for you! First, I actually want to get you trading the markets successfully so you can take your power back and own your own time!!! Second, and this is an IMPORTANT one…I want to save you from falling victim to the establishment! I want to save you from their predatory type business practices that they have…These guys only have their best interests in mind. How do we know that? Just look at the false promises. Listen to the narrative…It’s truly criminal!