I’ve come across the term ‘dead cat bounce’ in trading chats but still find it confusing.
Is it just a quick price rise before the downtrend resumes, or is there more to understand about it?
It’s a temporary recovery in a falling market that tricks traders into thinking the downtrend is over.
When a stock drops from $100 to $70, it might bounce back to $80. New traders see this and buy in, believing it’s reversing. But then it falls again to new lows around $60.
This bounce occurs because some traders cover shorts or bargain hunters step in. However, the underlying weakness remains.
Don’t get fooled by these moves. Wait for clear reversal signals like higher highs and higher lows before assuming a trend change.
The name comes from the idea that even a dead cat will bounce if dropped from high enough.
Basically it’s when price rebounds temporarily during a strong downtrend but the selling pressure is still there underneath.
I’ve seen traders get caught thinking the worst is over during these bounces only to watch their positions drop even further when the downtrend continues.
Usually happens when some buyers step in thinking they’re getting a bargain but the fundamental problems haven’t been fixed yet.
It’s a fake recovery. Price dips hard then bounces a little, tricking traders into thinking it’s going up, but it falls again.