A dead cat bounce is used to describe a short-lived increase in the price of an asset whose price has been declining. However, this recovery is usually temporary and means that the downtrend will continue. Downtrends are often interrupted by short periods of recovery or small rallies where prices rise briefly.
The concept of the dead cat leap is derived from the idea that a dead cat will bounce off the ground even if it falls from a height. This expression implies that even a being that has suffered a great fall can make a short comeback.
What Does the Dead Cat Bounce Mean?
The dead cat bounce is used by technical analysts as a price pattern. At first glance, it may look like this bounce can reverse the current trend, but it is considered a continuation pattern where the downward movement continues immediately afterward. The dead cat bounce occurs after the price breaks below its previous lows. In other words, it is not a reversal but an indication of a continuation of the downtrend.
Downtrends can be frequently interrupted by short periods of recovery or small rallies where prices temporarily increase.
A dead cat bounce is a price pattern that can often be recognized in hindsight. Analysts may try to predict that the rebound will be temporary using some technical and fundamental analysis tools. The dead cat bounce pattern can be seen during broad economic recessions. Also, a dead cat bounce is considered a difficult situation to recognize in advance, even for experienced traders, such as identifying the peak or bottom.
Dead Cat Bounce in Cryptocurrencies
The dead cat bounce is a technical analysis pattern used by traders who trade financial markets and cryptocurrencies.
The dead cat bounce pattern can be considered a continuation pattern that can be used to predict the continuation of the previous large price move. In the early stages of this pattern, market movements are similar to trend reversals. At first, the rebound may look like a reversal of the current trend, but immediately afterward, prices resume their downward trend again. Prices refuse to rise. They break previous support levels and establish a new record low, continuing the downtrend. Therefore, the dead cat bounce pattern can cause traders to fall into a situation known as a bull trap.
Downtrends are often interrupted by short periods of price recovery or small rebounds. They can occur as a result of traders or investors who want to close short positions or buy on the assumption that the asset has reached a bottom. A dead cat bounce is a price pattern that is usually recognized after the fact. Analysts try to predict that the rebound will only be temporary, using specific technical and fundamental analysis tools.
Short-term traders aim to profit from small rebounds and participants and traders may try to use a temporary reversal as a good opportunity to open a short position.
The first time the concept of a dead cat bounce was used in the news was in 1985 by Financial Times journalists Horace Brag and Wong Sulong. "This is what we call a dead cat bounce," they said, referring to a broker who had seen signs of recovery in the Singapore and Malaysian financial markets after strong bearish moves. This market move was later dubbed the dead cat bounce.
What Causes Dead Cat Bounce?
Causes of a dead cat bounce include the clearing of short positions, a mistaken belief by traders that a bottom has been reached, or traders looking for and trying to find oversold assets. As a result, a dead cat bounce is often a pattern that is not based on fundamentals, and therefore the market tends to resume a bearish trend after a short period.
What Is the Reversal of a Dead Cat Bounce?
A reversed dead cat bounce is a temporary and violent selling move that usually occurs during a prolonged bull market. Although it has the characteristics of a dead cat bounce, it is the exact opposite.
