What Is Dead Cat Bounce?
Also known as: Dead-Cat Bounce
In short
A dead cat bounce is a market term for a brief and limited price recovery after a sharp decline, which ends when the downtrend resumes and prices head to new lows.
The expression comes from a crude stock market saying that even a dead cat will bounce a little after hitting the ground when dropped from a height. After a large sell-off, the closing of short positions, investors who want to buy the dip and oversold conditions can push the price up temporarily. However, if the underlying reasons for the decline have not gone away, selling pressure starts again.
For example, if a token loses 40 percent in value after bad news and recovers 15 percent over the following days, then continues to fall and drops below the previous low, that recovery is retrospectively called a dead cat bounce. Technical analysts count among the possible signs the recovery occurring on low trading volume and the price failing to break through an important resistance level.
The main limitation of the concept is that it can be identified with certainty only after the fact: the same recovery could also be the start of a genuine trend reversal. For this reason, using it alone as a buy or sell signal can be misleading.
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