Dead Cat Bounce
A dead cat bounce is a temporary recovery in price during a larger downtrend, followed by a continuation lower. The term comes from the idea that even a dead cat will bounce if dropped from high enough. It traps buyers who mistake the bounce for a reversal.
Understanding the Concept
• Occurs after sharp declines when shorts cover and bottom-fishers buy • Usually on lower volume than the preceding decline • Fails to break significant resistance levels • Often retraces 20-40% of the prior drop before resuming down
Real-World Example
A stock crashes from $100 to $50 on terrible earnings. Over the next week, it bounces to $65 (30% recovery). Bulls declare the bottom is in. Then sellers return, price breaks below $50, and continues to $30. The $65 bounce was a dead cat bounce that trapped buyers.
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