Dead Cat Bounce
A temporary recovery in prices after a prolonged decrease.
What Is a Dead Cat Bounce?
A dead cat bounce is a price chart pattern in technical analysis. It occurs in assets that are in a long-term downtrend and represents a brief recovery, which is then followed by a return to the previous low and continued downward movement.
They may take place when a large enough number of bearish traders close their previously initiated short deals or when a similarly significant number of bullish investors believe that an asset has bottomed out and start opening long trades in it.
A dead cat bounce is a continuation pattern, i.e. after it takes place, the price continues moving in its prevailing long-term direction. The danger of this pattern is that it may at first appear as a reversal of the overall trend of an asset, leading bullish traders and investors to go long on it only for the price to continue falling afterward.
However, the peak of a dead cat bounce also presents an opportunity for traders to initiate short trades with the intention of taking profit when the asset resumes its fall.
While there are some methods of technical and fundamental analysis that allow trying to predict that the recovery is only temporary, it is a complex task with unreliable results. As such, dead cat bounces can only be definitively called after they have taken their course.