A technical rally is an upward movement in a security's price that is influenced by investment from technical traders. This rally may extend over time into a bullish trend or occur for a short term followed by a downtrend. Technical rallies commonly occur when a security’s price reaches well known support levels.
A technical rally is typically influenced the most by technical buying rather than fundamental factors although both can have an influence on the price.
Technical chartists account for a significant portion of each day’s market trading volume. These chartists typically tend to rely on many of the same key indicators for buying and selling. Quantitative market analysts may also watch the patterns of a stock as indicators for buy and sell positions.
When the charts indicate a strong bullish trend - higher potentially from a reversal, breakaway or runaway gap - then it is likely that the underlying security’s price will experience a technical rally.
Regardless of an investor’s profession, many investors will follow an underlying security’s Bollinger Band pattern for trading implications. Bollinger Bands are one of the most common envelope channels. This pattern draws a center midline based on a simple moving average with upper and lower bands two standard deviations above and below the midline. The upper and lower bands of a Bollinger Band chart form popular resistance and support lines that show the range in which a security’s price is trading within.
When a security’s price reaches the support line of a Bollinger Band it can create mass buying for the security. The Bollinger Band’s support line is typically a reliable trendline that shows the security’s lowest trading price. At this price both technical and non-technical analysts will typically find the security to be oversold. This price point typically generates high volume buying and increases volume on call options.
In this scenario a technical rally can lead to a reversal of the stock’s trend. If a reversal occurs a technical rally could be known as a breakaway signified by a breakaway gap in which the opening price jumps significantly higher than the previous day’s white candlestick close. Breakaway gaps are typically followed by runaway gaps where the stock price continues to gap higher.
If a technical rally is only short lived, then the security’s price will usually see less volume and return again to its support level. Technical rallies can occur at various points throughout a chart’s pattern. Other common situations where a technical rally may occur include a rounding top, double rounding top or head and shoulders pattern.