What Is a Dead Cat Bounce Pattern, and How Can One Trade It? Market Pulse

The most common way of using the phrase is to refer to the financial world. But there are likely other real-world examples where it can also be used. The first known usage of the phrase came in the mid-eighties from a couple of journalists from the Financial Times.

Ultimately, there is no single way to trade a dead cat bounce in stocks or any other asset. However, using these factors to seek confirmation and waiting for a further breakdown before taking a position can help traders navigate and take advantage of trading on this pattern. When a trader recognises a potential dead cat bounce, they might consider entering a short position to capitalise on the continuing downtrend. Here are some key strategies that may potentially help trade this pattern effectively. If broader market conditions and sentiment remain negative or if the news driving the rebound is not substantial, the bounce is likely temporary.

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However, since it was just a Dead Cat Bounce, the uptrend quickly reversed and prices resumed their downward trajectory shortly after. A dead cat bounce refers to a short or temporary rise in the price of a security after a significant decline. The phrase comes from the notion that a dead cat might bounce if dropped from a significant height but wouldn’t be able to recover longer term. Within markets, a dead cat bounce implies a temporary recovery in the value of an asset following a significant and protracted decline. A bull trap is when the price moves above a prior swing high or above a resistance area, only to quickly reverse to the downside. This traps traders and investors who thought the downtrend was reversing into an uptrend.

As the index bounced back, it gave investors a false sense of hope. Several economic indicators — such as lower unemployment and GDP growth — looked promising, but underlying market fundamentals were weak in the midst of the Great Recession. Consider the stock of the major financial institution Wells Fargo (WFC 1.51%), which traded at about $53 per share at the start of 2020. When the COVID-19 pandemic hit, fears of loan defaults and plunging consumer interest rates caused the bank stock to lose significant value. By the beginning of April, the stock price had declined to about $26. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer.

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Therefore, once we see an asset that has fallen hard, we assume it’s a good opportunity to buy. While this may work out in the long term, it’s not uncommon for assets to continue to fall following a short reprieve. It may not be the most eloquent way of putting it, but everyone in the stock market knows exactly what a dead cat bounce is. Market psychology plays a significant role in the occurrence of a Dead Cat Bounce. Emotions such as fear and greed can drive market participants to make irrational decisions, leading to buying into a temporary recovery.

However, we know that following that volatility came a bull run of the likes that the markets hadn’t seen in years. Adding further controversy to a dead cat bounce is how people perceive it. The last known one for the S&P 500 was back in March 2020 at the start of the COVID-19 outbreak. The benchmark index fell by over 30% in days but recovered by about 17% shortly after. Traders often use volume analysis and resistance levels to spot these patterns, noting that a true recovery is usually accompanied by sustained volume and breaking through significant resistance levels. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives.

• The dead cat bounce meaning refers to a temporary recovery in the price of a falling asset, followed by a continuation of the downtrend.
• Since many crypto investors are retail investors, or at least not whales, any price movement can trigger a chain reaction.
• Testimonials appearing on this website may not be representative of other clients or customers and is not a guarantee of future performance or success.
• This is because there is generally believed to be a higher-than-normal amount of FOMO in the crypto markets.
• Ultimately, the dead cat bounce is not founded on fundamentals and so the market continues to decline soon after.

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There is no rule for how long the price should drop before the short-term rallies are considered dead cat bounces. But the price must be in a downtrend, which means the price has been dropping below prior lows, and rallies are staying below prior highs. No, Dead Cat Bounces can be observed in various financial markets.

Furthermore, technical analysis often fails to account for sudden market changes caused by unexpected news or events. © 2024 Market data provided is at least 10-minutes delayed and hosted by Barchart Solutions. Information is provided ‘as-is’ and solely for informational purposes, not for trading purposes or advice, and is delayed.

However, the rest of the time, the price continues lower the next trading day. There is no time limit or requirement for the duration of a dead cat bounce. The length of a dead cat bounce is relative to the time frame it’s being tracked. Dead cat bounces can occur on charts as short as one minute or as long as monthly candlesticks.

This means that traders that notice a rally after a steep decline may think it is a dead cat bounce when in reality it is a trend reversal signaling a prolonged upswing. It is considered a continuation pattern, where at first the bounce may appear to be a reversal of the prevailing trend, but it is quickly followed by a continuation of the downward price move. It becomes a dead cat bounce (and not a reversal) after the price drops below its prior low. The opposite of a dead cat bounce is an inverted dead cat bounce. An inverted dead cat bounce is a temporary and often severe sell-off that occurs during an otherwise strong and continuing bull market.

Therefore, this pattern can turn into a bull trap if the bounce is strong, but the price fails to continue higher after breaking through the prior high/resistance. Distinguishing between a Dead Cat Bounce and a genuine recovery can be challenging. One key factor to consider is the duration and strength of the uptrend. A Dead Cat Bounce is typically short-lived and how to become a blockchain developer lacks the volume or momentum to sustain a prolonged recovery.

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Traders and investors lookout for this chart pattern as it may indicate the future short-term direction​ of an asset. Some traders use short-selling strategies during a Dead Cat Bounce to profit from the anticipated decline that follows the what is polkadot temporary recovery. However, timing these trades can be challenging, requiring considerable skill and experience. Before a Dead Cat Bounce occurs, there’s typically a rapid, often drastic, decline in the asset’s price. This plunge is usually due to widespread selling, sometimes instigated by negative news or poor financial results.

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