Short-Covering Rally

A short covering rally is a more orderly event where a large number of short sellers decide to take by covering their positions profit. The purchase to cover often leads to more buying. It can produce, wild a short squeeze, but in most cases, the action is milder.

You get a short rally seen in many beaten-down stocks. The biggest impact, though, is seen as the DOW and NASDAQ moves to cover. Higher as loads of shorts head

For example, the market rally that the U.S. attack on Iraq was almost certainly preceded a short rally. The DOW and NASDAQ had sliding since late January and approaching new lows. Short sellers had made outstanding profits.

Then got a few early bird buyers in a large open spark on March 17. The short has that market power as a cue to cover. Certain positions and lock in profits As more and more shorts bought to hedge share the DOW and the Nasdaq rose higher, attracting a horde of buyers who do not want to miss the move.

A typical short-rally occurring in the last hour of a market session. If bad news or other development hits the indexes on the open, short-sellers often hop on the downward momentum and push prices lower. By 03:00 ET the DOW may be down 100-plus points.

More often than not, the indices a comeback in the last hour stage. Short sellers who have made a tidy profit day cover their positions, and that usually produces a spurt of buying. It tends to fizzle out in the last few minutes before the end when the momentum players are out and outright sellers regain control.

Day traders and other smart investors looking for signs of a late-day short-rally as an opportunity to seize, as the DOW "Diamonds" (symbol DIA) and Nasdaq "Qubes" (symbol which index fund Exchange Traded Funds (ETFs) QQQ), or "e-mini" futures contacts on the S & P 500. As the rally runs true to form, the momentum players are out for the closing bell, and hoping a few dollars richer.

You, too, must keep an eye out for short covering rallies when you are looking to buy or sell. They can be useful in timing of your order.

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