Dead Cat Bounce: What It Is & Means to Investors

what is a dead cat bounce

In this article, we’ll take a deep dive to help you better understand loopring: the future of decentralized exchange protocol in stocks. We’ll review how to identify them using stock charts and compare them to other patterns so you can add them to your trading arsenal. Positive news with relevancy to the stock can provide a temporary boost of investor sentiment. In turn, this provides a short boost to the demand for the stock even though the underlying cause of the decline in price has not changed. Anchoring occurs from relying too much on a fixed reference point rather than adjusting expectations based on updated information. For example, a high or low occurred previously instead of looking at the macro-environmental factors.

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  1. To be clear, a dead cat bounce is a term used in technical stock analysis, of which we’re typically not fans.
  2. We’d like to share more about how we work and what drives our day-to-day business.
  3. In other instances, the term is used exclusively to refer to securities or stocks that are considered to be of low value.
  4. For example, you won’t hear any complaints from day traders, who look at the market from minute to minute and love volatility.
  5. Investors should be cautious and analyze other indicators before considering a trend reversal.
  6. This usually happens when there is no real underlying strength in the asset or stock.

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. A dead cat bounce is essentially a temporary recovery in a share price, generally of stock, after a substantial fall. Many times the bounce back is investors trying to cover their positions and stop the bleeding.

What is a dead cat bounce in the crypto market?

Like looking in the rearview mirror, dead cat bounces are trailing indicators you can only identify after they have bounced and resumed the downtrend. You can confirm a dead cat bounce until the final step of reversing back down to continue the downtrend. Eventually, the short-lived bounce fizzles out as each consecutive bounce gets smaller. With stocks, a dead cat bounce eventually resumes the downtrend, often breaking its previous swing low as earlier buyers may turn sellers as their positions turn red.

What Is A Dead Cat Bounce?

Tactics used by market manipulators may be used to temporarily inflate prices in an effort of personal gain. Tactics such as a spreading false rumors or engaging in a pump-and-dump will result in a short-lived increase in price. Consider the stock of the major financial institution Wells Fargo (WFC -0.98%), which traded at about $53 per share at the start of 2020. When the COVID-19 pandemic hit, fears of loan defaults and plunging consumer interest rates caused the bank stock to lose significant value.

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Along with this, it is doubtful that the security will recover with better conditions (overall market or economy). The earliest citation of the phrase in the news media dates to December 1985 when the Singaporean and Malaysian stock markets bounced back after a hard fall during the recession of that year. To be clear, a dead cat bounce is a term used in technical stock analysis, of which we’re typically not fans. Understanding the fundamentals of a business, not reading stock charts, is generally a better way to produce market-beating returns over time. Short-term traders may attempt to profit from the small rally, and traders and investors might try to use the temporary reversal as a good opportunity to initiate a short position.

what is a dead cat bounce

The standard usage of the term refers to a short rise in the price of a stock that has suffered a fall. In other instances, the term is used exclusively to refer to securities or stocks that are considered to be of low value. Second, the decline is “correct” in that the underlying business is weak (e.g. declining sales or shaky financials).

what is a dead cat bounce

The breakdown occurs when the stock collapses back down through the lower trendline and the downtrend resumes, causing shares to break down through the event low to new lows. 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. When stocks or stock markets collapse sharply and swiftly in a panic sell-off, they are prone to making a temporary short-lived reversion bounce.

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