A dead cat bounce is a term used by investors to describe a certain price chart pattern. Read the explanation below to find out what exactly it means.
What Is A Dead Cat Bounce?
The phrase “dead cat bounce” refers to a brief recovery in the declining price of an asset, shortly after which the downtrend resumes.
The term is often used in technical analysis and derives from the expression “even a dead cat will bounce if it falls from a great enough height” often used on Wall Street.
What You Need To Know About A Dead Cat Bounce
A dead cat bounce market pattern is usually triggered when a significant number of bearish traders close their short deals. It can also occur when a lot of bullish investors start opening long trades with an asset that they believe has bottomed out. With that said, recognizing this pattern ahead of time is hardly ever possible even for skilled investors.
The dead cat bounce definition is often confused with that of a bull trap, but even though these two patterns may exhibit similar characteristics, they don’t mean the same thing.
While the dead cat bounce is a general description for any episode of upward price movement that happens during a strong downtrend, a bull trap occurs when an asset breaks out above a prior resistance level and goes in a convincing yet short-term rally.
Note that a dead cat bounce is a continuation pattern – once it takes place, the price proceeds moving in its usual long-term direction. Thus, its danger is that it makes it look as if the overall trend of a crypto asset was reversing, which lures investors into going long on it only to see the price continuing to fall afterward.
However, the peak of a dead cat bounce still presents opportunities for traders to engage in short trades and gain profits when the crypto asset’s price resumes its decrease.
