Dead Cat Bounce: What Is It?

The stock market is the source of a great number of different price patterns, including the graphical pattern known as the “Dead Cat Bounce.”

What Exactly Does Dead Cat Bounce  Mean?

Dead cat bounce is the name given to a price trend that is utilized by technical analysts. One might refer to this as a “continuation pattern.” At first glance, the bounce could give the impression that the trend is shifting, but it is rapidly followed by additional price movement in the opposite direction. This is now a dead cat bounce rather than a reversal because the price has broken below its previous low.

When prices fall down, there are frequently brief moments of recovery or tiny uptrends that interrupt the downward trend. These can be what we call “stopping points.” This may be the result of traders or investors covering short positions or purchasing the stock because they believed it had reached its bottom.

A pattern of prices that is typically simple to see after the event is referred to as a dead cat bounce. An attempt could be made by experts to forecast that the rebound will not be sustainable for more than a certain amount of time using various methods for fundamental and technical analysis. A dead cat bounce can occur in the price of an individual stock or in the price of a group of stocks. It can also occur in the economy as a whole, such as when it is experiencing a recession.

Making a pattern entails the following steps:

1) An instantaneous and spontaneous movement downward. This action is not typically anticipated but has a significant impact anyway. It is beneficial to have a void at the first stages of the breakthrough. Every candle that follows the first one finishes its cycle with a low that is lower than the low reached by the first candle.

2) A new low has been established, and the price continues to roll back within the impulse wave. The most favorable outcome would be achieved if this correction did not extend beyond the level of 50 along the impulse wave of the Fibonacci sequence. “Dead cat bounce” is the name given to this particular wave.

3) After the price correction is complete, the price continues to fall, but it does so in a manner that is less abrupt and more gradual.

You can buy at the beginning of the jump and then sell at the very end if you use this model. It is quite evident that the first choice is technically highly challenging and calls for a great deal of talent and expertise to do in the correct and accurate manner. The second option is already the one that requires less effort to complete. This is a normal entry that comes at the end of the correction, and you have the following options available to you:

• the breaking of the trend line, which had been constructed using the points of the jump that were lowest overall.
• determined by keeping a tally of the number of times the impulse wave dropped below a certain point.
• additionally, this model can be utilized in graph analysis as a very robust supplementary signal.

You are able to set a safety stop (also known as a stop-loss) by making advantage of the Fibonacci levels that are generated by the impulse wave. If you select the second entry option, the stop is placed behind the maximum jump.

Example of Using a Dead Cat Bounce

Let’s take a look at a model from the past, shall we? A single share of Cisco Systems stock was worth $82 in March of the year 2000. The price of a share fell to $15.81 during the dot-com meltdown that occurred in March of 2001.

Over the course of his career, Cisco saw a great deal of “dead cat bounce.” The share price had climbed all the way back up to $20.44 by the time November 2001 rolled around, but by September 2002, it had fallen all the way down to $10.48, which was just a third of what it had been at its all-time high during the technology bubble in the year 2000.

There are several restrictions on what may be determined via dead cat returns. As was previously said, the vast majority of dead cat recoils aren’t discovered until after the event. Consequently, this indicates that traders who see a rally following a significant price decrease may mistake it for a “dead cat bounce,” but in reality, it is a “trend reversal,” which indicates that the price will continue to rise.

How can investors determine whether the recent increase is a “dead cat bounce” or an indication that the market is shifting in its direction? If we constantly answered this question correctly, we could get a significant amount of revenue. However, the fact of the matter is that there is no foolproof method for determining when the market is at its weakest point.