Rallies In a Downtrend

In late 2000, as the QQQQ were in a terrible downtrend, the market experienced some sharp rallies which excited buyers and caught bears off guard. All of these rallies failed to turn the market back higher. Look at the magnitude of the moves.

1-Oct 12 Close 75.13 Oct 13 Close 81.25 UP $6.12 or 8.14%
2-Nov 13 Close 70.06 Nov 14 Close 75.84 UP $5.78 or 8.25%
3-Dec 04 Close 63.69 Dec 05 Close 70.69 UP $7.00 or 10.97%
4-Jan 02 Close 53.44 Jan 03 Close 62.44 UP $9.00 or 16.8%

The rallies became more powerful the longer the trend was established as more shorts were involved and more bargain hunters were attracted to what was “obviously the bottom”. Rallies in a downtrend typically fail to hold, but premature short sales can also be very costly.