12th March 2025
The recent market correction has been both swift and brutal, with leading indexes pulling back between 8-10% from their highs. As these indexes attempt to find support at their rising 200-day moving averages, traders are left wondering whether a relief rally is imminent. This makes it the perfect time to discuss an often misunderstood phenomenon—counter-trend rallies.
The Depth of the Recent Selloff
The speed and magnitude of the recent drawdown have been striking. For instance, the Invesco QQQ ETF ($QQQ), which tracks the Nasdaq-100, has fallen 10.75% in just 11 trading days, averaging almost a -1% daily decline. Beneath the surface, the carnage among high-momentum stocks has been even more severe:
- $TSLA: -30% in 12 days
- $PLTR: -32%
- $CVNA: -35%
- $APP: -45%
- $OKLO: -47%
Many of these stocks have moved nearly straight down, with only minimal consolidation pauses lasting one to three days. They are now deeply oversold and approaching critical technical levels such as 200-day moving averages, prior bullish gaps, and high-volume consolidation (HVC) zones—all of which could act as support.
For spread bettors and CFD traders, this presents both risks and opportunities. Identifying when a market is oversold and primed for a counter-trend move can be a highly effective strategy when using leverage, as sharp reversals often occur when most traders least expect them.
Why Counter-Trend Rallies Occur
From a historical perspective, steep market declines often lead to sharp relief rallies. Several key factors fuel these counter-trend moves:
- Oversold Conditions – When stocks drop too quickly, they become stretched to the downside, making a bounce more likely.
- Sentiment Shifts – Extreme bearish sentiment and panic selling often set the stage for a short-term reversal.
- Key Technical Levels – Markets tend to respect important support areas, such as the 200-day moving average, triggering buying interest.
- Short Covering – Traders who profited on the downside may begin covering their shorts, fueling an upside move.
- Reversion to the Mean – Price action rarely moves in a straight line for long; after a rapid decline, mean reversion can lead to a temporary bounce.
For spread betting, counter-trend rallies provide an opportunity for short-term trades, allowing traders to go long at key inflection points or exit short positions before getting caught in a sharp reversal.
The Dangers of Overstaying the Short Trade
While the past two weeks presented ideal conditions for short sellers, the current setup has shifted. The best risk-reward opportunities to the downside may have already passed.
- Shorting at extreme levels increases the risk of getting caught in a violent counter-trend rally.
- Traders often develop tunnel vision, remaining overly bearish even as conditions change.
- Many traders give back their profits by persistently shorting bounces, assuming the market will continue to fall in a straight line.
This is a classic mistake. Some of the biggest losses in trading history have come from traders who stubbornly fought counter-trend rallies, refusing to acknowledge shifting momentum.
Lessons from Market History
Counter-trend rallies are a recurring feature of market cycles. Some of the most powerful market bounces have occurred after extreme selloffs, often retracing a significant portion of the decline in a short period.
For example:
- The 2008 financial crisis saw multiple counter-trend rallies exceeding 20-30%, despite the broader bear market.
- The COVID-19 crash of 2020 featured an abrupt 35% drop, followed by a relentless rebound that defied short-sellers.
- Even in early 2022, as markets entered a sustained downtrend, sharp relief rallies repeatedly caught traders off guard.
For spread bettors, studying historical counter-trend rallies can help anticipate potential bounce points and improve trade timing. Market patterns often repeat, making historical analysis an essential tool in spread betting and CFD trading.
Adapting to the New Market Environment
While no one can predict the exact duration or magnitude of a counter-trend rally, traders can prepare by:
- Recognizing that trading conditions have changed and adjusting strategies accordingly.
- Being cautious about chasing shorts after an extended decline.
- Understanding that markets often repeat similar patterns—steep drops create the conditions for sharp bounces.
- Remaining flexible rather than rigid in their bias.
For spread bettors and CFD traders, this means knowing when to shift from shorting weakness to buying strength, capitalizing on the volatility that counter-trend rallies provide.
As the saying goes: “The market can stay irrational longer than you can stay solvent.”
Final Thoughts
The recent selloff has been severe, and traders who positioned themselves correctly have likely done well. However, the next phase of price action may favor sharp, unexpected bounces. Whether these counter-trend rallies last for a few days or a few months is uncertain, but history suggests they are inevitable.
Avoid getting trapped in an extreme bearish mindset, and remember: understanding where stocks are in their cycle is more important than stubbornly clinging to one directional bias.
Stay adaptable, trade wisely, and always manage risk.
