What is Dead Cat Bounce?

A dead cat bounce is a price chart pattern used in financial and technical analysis. It depicts the financial activity of an asset that experiences a brief price recovery after a prolonged trend downwards. The bounceback is followed by a return to a downward trend.

The name of the pattern originated from the saying “even a dead cat will bounce if dropped at a certain height.” The dead cat bounce market pattern is commonly used in both traditional and cryptocurrency markets to observe asset behavior.

Dead cat bounce trends occur when a significant number of bearish traders close their short deals or if many bullish investors think that the asset has reached the lowest possible decline and thus open long positions.

The dead cat bounce pattern is continuous since the price of the asset keeps moving in the predominant direction, i.e. downwards, even after the sudden recovery. The pattern can seem misleading since it appears as a reversal of the general trend. This can lead to bullish traders putting long positions on it, although the price proceeds with its downwards trend.

During the peak of a dead cat bounce, traders may initiate short trades which allow them to make a profit when the bounce ends and the asset resumes the downward momentum.

Predicting a dead cat bounce can be complicated, although there are technical and fundamental analysis tools to aid in the process. In general, dead cat bounce patterns can only be recorded after they have passed.

Some variables can be used to determine the cause of a dead cat bounce. These include an increase in bearish traders closing their short positions or a growing number of bulls opening new long positions with the expectation that the asset has reached its lowest price. Momentum traders may also start placing positions if the market hints that the asset is oversold.

Inexperienced traders tend to fall for dead cat bounces as they believe that the temporary uptick is a sign of a price recovery. Due to the lack of regulations in the crypto industry, dead cat bounce patterns can be heightened by illicit activities, such as price manipulation or tailgating.

In order to determine whether an uptick in the asset’s price is a bullish recovery or a dead cat bounce, analysts must continuously observe the market activity. While sometimes the price rising can point to a reversal of the market trend, if the downward trend continues, it may not reach the bounce levels for an extended period.

Dead cat bounces do not reflect the true value of an asset. Instead, they show the dynamic way the market’s collective psychology is following. Traders looking into opening new positions must always take precautionary measures into account.