Dead Cat Bounce What It Means in Trading

The duration of a dead cat bounce can vary, but it’s typically a short-lived phenomenon that lasts a few days to a few weeks at most. The rebound is often brief and temporary, driven by short-term factors rather than fundamental ones. Once the buying pressure subsides, the asset’s price will likely resume its downward trend. The share price of Yes Bank showed the characteristics of a Dead Cat Bounce after an initial negative event. Then, early in the year, the price bounced back up somewhat, fueling investor optimism for a recovery. But this rally just turned out to be a temporary blip, not a true reversal of the downtrend.

Dollar Volume

Investors often use historical data, charts, moving averages and other data to determine these price movements. A dead cat bounce is typically only identified after the fact when time shows how the price played out. That said, a dead cat bounce may indicate that a temporary recovery without a tangible reason could be short-lived and a long-term rise in price isn’t on the horizon.

Dead Cat Bounce in Trading: A Starter Guide

Despite criticism from some financial experts, the occurrence of Dead Cat Bounces challenges the Efficient Market Hypothesis, highlighting the impact of market psychology and irrational behavior. A more recent example can be seen in the cryptocurrency market where Bitcoin experienced a Dead Cat Bounce in 2018 after its price fell drastically from its peak in December 2017. In contrast, a Genuine Recovery tends to exhibit higher trading volumes and stronger momentum, indicating greater market participation and confidence. It is a cynical and somewhat macabre reference, reflecting the volatile nature of markets and investor psychology. The offers that appear on this site are from companies that compensate us.

• The markets continued to decline as the variant spread weighed heavily on investors’ minds.
• Dead cat bounces occur in ongoing downturns, much like a falling cat may twitch when it hits yet remains still.
• Anchoring occurs from relying too much on a fixed reference point rather than adjusting expectations based on updated information.
• If you are a long-term investor, the key is to diversify your portfolio and think long term.
• Bearish is when prices are falling, or someone expects a price to fall.

Understanding the Dead Cat Bounce Pattern

It is important to remember that no trading strategy is foolproof, and market conditions can change rapidly. Therefore, ongoing education, adaptability, and a disciplined approach are key to achieving long-term success in financial markets. One of the most notable examples of a dead cat bounce occurred during the 2008 financial crisis. Following the collapse of Lehman Brothers and the subsequent turmoil in the global financial markets, many stocks experienced a significant decline in value.

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Correctly identifying a stock price’s low point or the start of a price rally is tantamount to attempting to time the market. Investors are much better served by buying and holding the stocks of quality companies in order to sustainably build their wealth. To counteract these biases, implement a disciplined and evidence-based approach to investing, look at a longer time frame, or diversify in an index fund. Furthermore, they emphasise how important it is to diversify, be patient, and have a longer-term perspective which can reduce the impact and importance of short-term fluctuations and noise. By understanding the psychological traps that can lead to a dead cat bounce, investors can make achieving their financial goals more likely and avoid costly errors. A dead cat bounce is a price pattern that is usually recognized in hindsight.

This confirmation occurred in April, when Yes Bank’s price peaked lower than the January highs and proceeded to plunge sharply once again. Savvy traders would look to short Yes Bank around the April peak, with a stop above the prior high. The profit target is a move down to fully retrace the counter-trend bounce.

Stay ahead of the market!

Candlestick chart analysis is filled with interesting names, including gravestone doji, three white soldiers, three black crows, morning star and hanging man. Hawkish, for example, is when interest rates are expected to rise, and dovish is when they are expected to go lower. Bearish is when prices are falling, or someone expects a price to fall. Bullish is when prices are blockchain news and updates rising, or someone expects a price to rise. With all strategies, risk-management is important because it is unknown whether the price will keep falling or at what point the price will start rising again.

A dead cat bounce is a temporary, short-lived recovery of asset prices from a prolonged decline or a bear market that is followed by the continuation of the downtrend. It refers to a small, brief period of recovery in a falling market that ultimately continues its downward movement. A dead cat bounce typically occurs when traders and investors believe that prices have reached the bottom and the market starts to rise. However, the recovery is not supported by fundamentals and proves to only be temporary before prices resume their downward trajectory. A dead cat bounce indicates that a brief recovery in the market or price of an asset is only temporary and not supported by fundamentals, ultimately leading to a continuation of the downward trend. A dead cat bounce gives the false impression china ‘close’ to launching its own digital coin amid growing interest in facebooks libra that the bottom has been reached and the market or asset price will now embark on a sustained upside move.

Specifically, it help desk technician job description template workable when there is a rise in cases or new variants, the markets seem to overreact in one direction and then overcompensate back in the other. For this to be a textbook dead cat bounce, we would have liked to see the S&P 500 continue to tumble. Momentum indicators can be used to confirm that the downtrend is ready to continue.