A dead cat bounce typically happens after a long-term period of market decline. The goal of trying to identify a dead cat bounce is to determine whether a stock or other asset that gains value after a prolonged decline is going to keep increasing in price. If a trader has sold a particular stock short and views a price increase as a dead cat bounce, they may decide to maintain the short position. Conversely, if a trader views a price movement as a sustainable rally, then the trader should close the short position. While successful trades can result in profits, there is always the risk of mistaking a genuine reversal for a temporary bounce, leading to potential losses.

The rally loses momentum just as fast as it started, trapping many bullish traders in the process. Sometimes, there is a gap-up in the stock price followed by a sustained decline. A gap-up is when the price of an asset opens higher than its previous close, creating a gap. You might find yourself executing a successful strategy or sometimes getting drawn into the wrong side of the trade.

The daily candlestick chart on NVAX illustrates the peak at $236.50 on what will happen to bitcoin in 2020 December 20, 2021, before falling 52%, forming the flag pole to an event low at $112.52 on January 6, 2022. The flag formed on the dead cat bounce by 22.3% to a peak of $137.66 on January 10, 2022. The bounce had parallel higher highs and higher lows, as indicated by the parallel upper and lower diagonal trendlines. The bear flag breakdown occurred on NVAX, which fell under the lower trendline at $131 as it resumed the downtrend to a low of $66.38 on January 24, 2022. With the different time frames, it’s possible to have a dead cat bounce on a shorter time frame within a dead cat bounce on a longer time frame. Eventually, the short-lived bounce fizzles out as each consecutive bounce gets smaller.

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For example, the price moves above a prior swing then drops but stays above the prior swing low, and then moves back above the swing high. That indicates that the asset is on an uptrend but that a reversal is underway. Yes, several technical indicators can aid in identifying a potential Dead Cat Bounce.

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Similarly, in financial markets, the dead cat bounce suggests that the temporary rise in price is merely a reflexive rebound and does not indicate a long-term bullish reversal. A dead cat bounce refers to a temporary and deceptive recovery in the price of an asset or security after a significant decline. It is a phenomenon where the price ivacy vpn review 2020 experiences a short-lived upward movement, giving the impression of a potential market reversal and enticing some traders to believe that the worst is over.

Is a Dead Cat Bounce Bullish or Bearish?

Anchoring occurs from relying too much on a fixed reference point rather than adjusting expectations based on updated information. For example, a high or low occurred previously instead of looking at the macro-environmental factors. Some investors might take this information to mean that the stock/commodity is over or undervalued after a sharp decline and hope for a quick rebound in the form of a V-bottom. Sustained recoveries can take time to develop, and investors should be cautious of making hasty investment decisions based on short-term market fluctuations.

• The market sentiment refers to the attitude of investors towards a market.
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• It’s important to note that these indicators are not foolproof, and there is always a risk of misinterpreting market signals.

Understanding this pattern is crucial for traders aiming to navigate market downturns. This article delves into what a dead cat bounce is, its causes, how to identify it, and strategies for trading it. Rallies that occur during a dead cat bounce are short-lived because there is not enough buying volume. Buyers who caused the spike in price cannot sustain the trend, leading to a steeper decline. The lack of buying volume may also be attributed to traders using the sudden increase in price as an opportunity to cut their losses and exit positions.

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The markets continued to decline as the variant spread weighed heavily on investors’ minds. We saw this with both the Delta variant and recently with the Omicron variant. The next session saw a massive rebound as investors worldwide bought the temporary dip. Some added volatility led to some people believing it was a dead cat bounce.

You can trade each dead cat bounce step with an effective trading system. You can look for dead cat bounce stocks with the MarketBeat stock screener. There are limitations to identifying a dead cat bounce, and even the best analysts get it wrong. For example, in March 2009, after a prolonged bear market, the renowned economist Nouriel Roubini dismissed the rally as the start of a deadcat bounce stock market.

It represents a brief, false recovery in a downtrend, followed by a continuation of the falling market. Traders typically watch for the last higher low established during the bounce to be traded through. In other words, they wait for the short-term bullish trend to appear to falter with a lower low. As seen in the dead cat bounce chart above, this indicates that the most recent support how to buy icx level during the bounce has failed, signalling the downtrend might continue. The rebound may fail to break through significant resistance levels, such as a prior support level turned resistance or the last swing high in the downtrend. If the price approaches but cannot surpass these levels and subsequently drops again, it’s a strong indication of a dead cat bounce.