Dead Cat Bounce

What is a Dead Cat Bounce?

A Dead Cat Bounce is a temporary recovery in the price of a declining asset that is followed by a continuation of the downtrend. This term, borrowed from stock market terminology, is often used in cryptocurrency markets to describe a short-lived price increase during an overall bearish trend.

Key Aspects of Dead Cat Bounce

1. Temporary Recovery: A brief upward price movement in a downward trend.

2. Continuation of Downtrend: The price typically resumes its decline after the bounce.

3. False Signal: Can mislead traders into thinking a reversal is occurring.

4. Volatility Indicator: Often indicates high market volatility.

5. Psychological Element: Reflects market psychology and investor sentiment.

How Dead Cat Bounce Works

The typical pattern of a Dead Cat Bounce involves:

1. Initial Decline: A significant drop in the asset's price.

2. Short-Term Recovery: A brief period of price increase.

3. Resistance: Price often meets resistance at a previous support level.

4. Failure to Sustain: The recovery fails to maintain momentum.

5. Continued Decline: Price resumes its downward trajectory.

Identifying a Dead Cat Bounce

Key characteristics to look for:

1. Preceding Downtrend: Occurs after a significant price decline.

2. Sudden Price Increase: A sharp but short-lived upward movement.

3. Low Volume: The bounce often occurs on lower trading volume.

4. Failure at Resistance: Price typically fails to break through key resistance levels.

5. Resumption of Downtrend: The price continues to fall after the brief recovery.

Dead Cat Bounce vs. Trend Reversal

Distinguishing from genuine trend reversals:

1. Duration: Dead Cat Bounces are typically shorter-lived.

2. Volume: True reversals often see higher trading volumes.

3. Technical Indicators: Reversals usually show stronger signs on technical indicators.

4. Price Action: Dead Cat Bounces often fail to break key resistance levels.

5. Market Sentiment: Genuine reversals are usually accompanied by shift in overall sentiment.

Similar Terms

• Bull Trap: A false signal indicating that a declining trend in a market has reversed.

• Digital Asset: A broader term that includes crypto assets.

• Blockchain: Decentralized and immutable digital ledger technology that records transactions across a network of computers.