A relief rally in the offing
Last week, I warned you that volatility in financial markets would rise further and reach crescendo levels that retail traders are not geared to handle. Sure enough, the markets gyrated wildly with larger-than-normal price swings. The expectations of a mean-reversion upmove and empirical evidence of a shorter trading week favouring bulls also played out as expected.
News of a ceasefire and hopes of the end of the war in Iran lifted sentiments to euphoric levels. A bear squeeze (when bears/short sellers are forced to close their short sales due to rising losses) accelerated the rally. These are times when bulls buy, given their bullish nature.
And bears are buying due to panic over short-selling losses rising faster than traders can handle and provide for.Such times when both bulls and bears are aligned in the same direction are called “dual pressure” events. Price moves are invariably larger than average, and volatility is extremely high as emotions dominate sentiments. And emotions are anything but rational.
Which is why I still categorise last week's rally as a relief rally rather than a complete trend reversal. Bear market rallies and bull market corrections are counter-trend events (when prices move temporarily against the larger trend). Not only do they catch traders by surprise, but they also mislead traders into believing that the tide has turned.
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