What Is a Dead Cat Bounce in Investing? The Motley Fool

Understanding the fundamentals of a business, not reading stock charts, is generally a better way to produce market-beating returns over time. A dead cat bounce is an investing term for the temporary rise in the price of a stock or other asset during a long period of decline. The morbid term comes from the idea that if it falls far enough, even a dead cat will bounce. A dead cat bounce is a price pattern that is usually recognized in hindsight. Analysts may attempt to predict that the recovery will be only temporary by using certain technical and fundamental analysis tools. A dead cat bounce can be seen in the broader economy, such as during the depths of a recession, or it can be seen in the price of an individual stock or group of stocks.

The temporary price increase was probably triggered by the federal government’s first economic stimulus. At the time, significant uncertainty remained regarding the future of the banking industry. The name « dead cat bounce » is based on the notion that even a dead cat will bounce if it falls far enough and fast enough. Since the target for a dead cat bounce pattern is the size of the prior range, we simply add this to the low that is broken. As you can see in the above chart, we have highlighted where the pattern completed and you should book your profits.

Dead Cat or Market Reversal?

It is often driven by short-term speculative buying or opportunistic trading. Dead Cat Bounce is a financial term used to describe a temporary recovery in asset prices after a significant decline, followed by a subsequent fall. KSS triggers a dead cat bounce, spiking 39% to $43.10 by June 9, 2022. The ascending lower trendline and upper trendline are angled inward, not parallel.

It is better to avoid going against the market to prevent losses, especially when more news is being released about the company. These patterns are typically quite hard to spot in real time and only become apparent after the rally. The causes behind a dead cat bounce are largely the result of these effects.

Technical analysis

Stock prices for Cisco Systems peaked at $82 per share in March 2000 before falling to $15.81 in March 2001 amid the dot-com collapse. The stock recovered to $20.44 by November 2001, only to fall to $10.48 by September 2002. Fast forward to June 2016 and Cisco traded at $28.47 per share, barely one-third of its peak price during the tech bubble in 2000.

Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. In contrast, a Genuine Recovery tends to exhibit higher trading volumes and stronger momentum, indicating greater market participation and confidence.

Commodity Market

You can trade each dead cat bounce step with an effective trading system. You can look for dead cat bounce stocks with the MarketBeat stock screener. For the initial step of a steep decline, traders can try to short-sell the stock. When the stock makes a bottom and attempts to bounce, traders can try to buy long to capitalize on the bounce. Adding a price indicator like moving averages can help visualize a stock chart’s trend. There are limitations to identifying a dead cat bounce, and even the best analysts get it wrong.

1. This leads to investors selectively choosing what information they believe as long as it supports their optimistic outlook for the chosen stock.
2. In the commodity markets, prices can experience a Dead Cat Bounce due to factors like supply-demand imbalances or geopolitical events.
3. As you can see, the markets took a serious beating during these six-weeks in 2000.
4. With the assumption that other traders are also buying into the stock because of its recovery, a trader will purchase shares hoping to have bought the dip before a long-term upward trajectory.
5. As we noted above, in about half the cases, the initial decline brings the price down to its trend low.
6. For example, you won’t hear any complaints from day traders, who look at the market from minute to minute and love volatility.

How can something so basic as a rectangle be one of the most powerful chart formations? Day trading is defined as an approach to trading where the trader opens and closes the trade during the same trading day. Day trading is sometimes referred to also as scalping or intra-day trading…. Above you are looking at the 3-minute chart of Netflix from June 20, 2016. The image displays a strong bearish trend, which started in the $95.80 range. However, it is crucial to approach such situations with caution, conduct thorough analysis, and consider multiple factors before making investment or trading decisions.

The daily candlestick chart on NVAX illustrates the peak at $236.50 on December 20, 2021, before falling 52%, forming the flag pole to an event low at $112.52 on January 6, 2022. The flag formed on the dead cat bounce by 22.3% to a peak of $137.66 on January 10, 2022. The bounce had parallel higher highs and higher lows, as indicated by the parallel upper and lower diagonal trendlines. The bear flag breakdown occurred on NVAX, which fell under the lower trendline at $131 as it resumed the downtrend to a low of $66.38 on January 24, 2022. Remember that the dead cat bounce is a downtrend continuation pattern.

Trading during a dead cat bounce requires a strategic and disciplined approach to capitalize on short-term price fluctuations while managing the inherent risks. This historical example highlights the importance of distinguishing between a dead cat bounce and a genuine market reversal, especially during times of extreme market volatility and uncertainty. A long-term time horizon should calm the fears of those invested in stocks, making the short-term bouncing cats less of a factor. A well-diversified portfolio can offer some protection against the severity of losses in any one asset class. For example, if you allocate some of your portfolios to bonds, you are forex brokers uk forex broker reviews best forex brokers online ensuring that a portion of your invested assets is working independently from the movements of the stock market. This means your entire portfolio’s worth won’t fluctuate wildly like a torturous yo-yo with short-term ups and downs.

However, within this downturn, there were instances of dead cat bounces that lured investors into thinking that the decline was over and many decided to try to ‘buy the dip’. However, these bounces turned out to be short-lived, and many of these companies eventually faced bankruptcy or significant declines in their stock prices. A dead cat bounce, a sharp bounce following a steep price drop or a prolonged downtrend, is considered a trailing indicator for traders and investors who practice technical analysis. The term dead cat bounce derives from the belief that even a dead cat can bounce if it falls from a high enough elevation. Companies experiencing a dead cat bounce may face challenges or negative sentiments open a forex account with the uk’s no 1 trading platform in the market, but various factors can contribute to their future performance.

However, if executed correctly, it can also provide lucrative rewards due to the heightened market volatility. Genuine Recoveries occur in more positive market environments bitcoin is not a legal tender in zambia says central bank with optimistic sentiment. They reflect a genuine improvement in market conditions and investor confidence. During a Dead Cat Bounce, the volume and momentum behind the price increase are typically lower compared to a Genuine Recovery.

They often do so before other investors learn about the business’s profitability to make a profit. Once the price drops below its previous low, the phenomenon is said to have occurred. It can occur in any financial asset, like an index, currency, cryptocurrency, or commodity. It is also sometimes seen in the economy as a whole, such as during a recession. This is a classic example of what is widely known as the « sucker rally, » a brief increase in the price of a certain stock or the market as a whole. But, unfortunately, it is only long enough for « suckers » to get on board before the market falls again.