Profit-Taking Sell-Off-Short-Covering Rally

Both of these terms refer to short-term events which can unfold into longer term trends. In many cases they are the catalyst which initiate breakdowns/breakouts above/below support/resistance zones. Volume will once again play a key role in determining the scope of either development and technical analysts will additional seek confirmation from other sources, such as technical indicators or fundamental developments.

A profit-taking sell-off appears when traders realize floating trading profits, causing them to sell the long positions. This often takes place as a sideways trend forms inside of a resistance zone. This represents a counter-trend move and depending on other factors it can be limited to a short-term event before the advance continues or the beginning of a longer-term sentiment shift. Short-term sell-offs are important to keep the long-term trend healthy and alive.

A short-covering rally often develops inside of a support zone when traders buy the asset which was shorted in order to return it to the third-party from where they borrowed it. When traders place a short-order they borrow the asset from a third-party and sell it in the market, when prices drop they purchase the asset and return it to the third-party, realizing a profit. Placing a short-order without borrowing the asset is referred to as a naked short positions or naked short-selling which can appear as an asset collapses. This is deemed illegal in most assets/markets. A short-covering rally can either be a short-term counter-trend move before the sell-off resumes or indicate a long-term sentiment shift.

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