Dead cat bounce

<p><strong>Dead cat Bounce!</strong> A new term? Not really but definitely something that we haven’t seen for more than a generation.</p>
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<p>In general, investors throughout the years invented this term as a follow up to a market free fall. By definition,  the “Dead cat Bounce” is simply a market phenomenon that translates into  temporary small and short-lived rebounds of an asset’s price within a prolonged period of downside. This term is based on the idiom that “<em>even a dead cat will bounce if it falls far enough and fast enough</em>“. Hence in the financial market it is said that even if an asset falls with a considerable speed, it would rebound as even a dead cat would bounce. However, every time there is  a rebound, the overall initial trend is then anticipated to resume, bringing the bearish influence back into play.</p>
<p>In addition, the phenomenon can occur in any market, yet is particularly prevalent in equity markets. It is often the case that it is considered  a continuation pattern.</p>
<p><strong>Why are we raising this topic now?</strong> This March, was the first time after Black Monday 1987 that we have seen the worst intraday selloffs in stock markets. Since February 20th, the stock market entered an aggressive bear market with a few days of an absolute rally. An example was the 13th of March in which the stock market roared back in the biggest one-day rally since 2008 after its worst single-day crash in 33 years just a day before. <strong>This is the classic dead cat bounce.</strong></p>
<p><a href="https://analysis.hotforex.com/wp-content/uploads/2020/03/2020-03-31_16-00-42-1.png"><img class="alignnone size-large wp-image-119722" src="https://analysis.hotforex.com/wp-content/uploads/2020/03/2020-03-31_16-00-42-1-1024×582.png" alt="" width="696" height="396" srcset="/wp-content/uploads/2020/03/2020-03-31_16-00-42-1-1024×582.png 1024w, /wp-content/uploads/2020/03/2020-03-31_16-00-42-1-300×171.png 300w, /wp-content/uploads/2020/03/2020-03-31_16-00-42-1-768×437.png 768w, /wp-content/uploads/2020/03/2020-03-31_16-00-42-1-1536×874.png 1536w, /wp-content/uploads/2020/03/2020-03-31_16-00-42-1-696×396.png 696w, /wp-content/uploads/2020/03/2020-03-31_16-00-42-1-1068×607.png 1068w, /wp-content/uploads/2020/03/2020-03-31_16-00-42-1-739×420.png 739w, /wp-content/uploads/2020/03/2020-03-31_16-00-42-1.png 1630w" sizes="(max-width: 696px) 100vw, 696px" /></a></p>
<p>If you closely observe stock market behaviour in March you will notice that there is a dramatic decline, with a number of days when the market reversed some of  its losses, but failed to take the bait, and eventually fell back down again. This is a situation of portfolio managers wanting to sell some of their positions and when they see some strength in the market, decided to unload. This is what we call a “dead cat bounce” after it falls from high enough. Remember however that not every correction/reversal can be interpreted as a dead cat bounce.</p>
<p>Theoretically this term is defined as the term in which,</p>
<ul>
<li>A stock in a <strong>severe steep decline</strong> has a sharp bounce off the lows.</li>
<li>A small upward price movement in a bear market after which the market continues to fall.</li>
</ul>
<div><span>Unfortunately, I need to highlight that there is not an easy way to determine in advance whether an upwards movement is a dead cat bounce which will eventually reverse quickly or whether it is a trend reversal. There is nothing easy in identifying the bottom of the market.  However to a large extent a dead cat bounce is a </span><strong>retracement</strong><span>, in comparison to a reversal, i.e. it is temporary.</span></div>
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<div>Dead cat bounce as a technical analysis tool and more precisely as a continuation pattern could be tradable from short-term or medium term traders. Having explained this phenomenon, a follow-up article will elaborate on how market participants can trade a dead cat bounce.</div>
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<p><strong>Click </strong><a href="https://www.hotforex.com/en/trading-tools/economic-calendar.html"><strong>here</strong></a><strong> to access the HotForex Economic Calendar</strong></p>
<p><strong>Andria Pichidi</strong></p>
<p><strong>Market Analyst</strong></p>
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