In finance and economics, a rebound refers to a recovery from a past time of unfavourable activity or losses, as in the case of a business reporting excellent profits following a year of losses or launching a successful product line following a string of unsuccessful launches.
A rebound in the context of stocks or other securities denotes a price increase from a lower point.
A rebound for the overall economy denotes an increase in economic activity from lower levels, such as the recovery from a downturn.
Understanding Rebounds
The economy is also characterized by periods of economic recovery following slumps in activity or declining GDP. Economists define a recession as two consecutive quarters of negative economic growth. The business cycle, which includes expansion, peak, recession, trough, and recovery, includes recessions. Recovery from a recession would happen as economic activity rises up and GDP growth resumes its positive trend. Policymakers’ monetary and/or fiscal stimulus measures may help the economy recover.
Dead Cat Bounce vs. Trend Reversal
A comeback could indicate a change in the direction of the dominant downtrend, from bearish to positive. It could also be a dead-cat bounce, a fake rally, or a selloff that is steeper. A dead cat bounce is a continuation pattern in which there is first a significant comeback that initially seems to be reversing the secular trend, but it is swiftly followed by a continuation of the downward price motion. After the price falls below its previous low, it turns into a dead cat bounce (and not a reversal).
Frequently, downtrends are broken up by tame rallies or recovery phases where prices momentarily recover. This may happen as a consequence of traders or investors covering their short positions or as a result of purchases made under the impression that the security has achieved a bottom.
Historical Examples of Rebounds
After a sharp selloff, stock prices frequently rise as buyers look to buy shares at a discount and technical indicators show that the move was oversold.
Investors were caught off guard by the abrupt stock market downturn that shook markets in mid-August, with the Dow Jones Industrial Average (DJIA) losing 800 points, or 3%, on August 14, 2019, the worst trading day of that year. The blue-chip bellwether did, however, recover a little the following session, recovering nearly 100 points back thanks to solid retail sales numbers for July and Wal-stronger Marts than anticipated quarterly earnings, which helped calm market concerns.
Similar to how stocks fell on Christmas Eve in 2018, trading for a shorter period of time than usual due to economic worries that led to the indexes posting their greatest pre-Christmas day losses in a number of years—in the case of the Dow, the worst losses ever in its 122-year history. The Dow Jones Industrial Average, the S&P 500, the Nasdaq Composite, and the small-cap Russell 2000 index all saw gains of at least 5% on the first trading day after Christmas, which was December 26, 2018. The Dow experienced its largest one-day increase during the session, rising 1,086 points.
Rebound trading strategy
Who said moving averages are no good? This strategy proofs the reverse. MAD Rebound is one of the more than 50 free trading strategies in NanoTrader. This strategy appears to give consistently good results over time. It has several original features, not in the least the MAD_Exit instead of a traditional stop. The MAD_Exit tends to avoid unnecessary stop outs and tends to reduce the size of a loss as compared to a traditional stop.
The rebound trading strategy offers many advantages:
- Without applying leverage, it is capable of producing a good return.
- It does not employ a conventional stop, preventing needless stop outs.
- Since there is no conventional stop, losses are smaller.
- Trades can be made manually, partially automatically, or automatically.
- It is especially appropriate for markets that are fluctuating sideways!
- It boasts a high percentage of profitable trades, reducing the trader’s mental strain.
The strategy is less suitable for markets that move strongly in a clear sustained direction. Early morning trades should be avoided either due to price gaps skewing the averages or due to the strong directional movement.