Web Trader MT5
A dead cat bounce is a short, sharp rebound in the price of an asset that has been falling heavily; a rebound that happens to be short-lived. The name derives from the grim fact that even a dead cat will bounce as long as it falls from a sufficiently high height.
What it implies is that the bounce, per se, does not mean anything. It is not a recovery indicator or an indicator that the worst is over. It is merely a technical response; short sellers cashing in, bargain hunters dipping in, or the market taking a breath, before underlying selling pressure reassertion.
Dead cat bounces are dangerous because they are more easily recognized in hindsight than in real time. A trader confusing a true reversal may find themselves entangled in an ongoing downward trend.
Example: A firm issues a profit warning, and its stock declines by 35 percent over three days. On the fourth day, the share surges 8% as bargain hunters rush in. In headlines, it is termed as a recovery.
However, the underlying issues have not changed, and institutional investors continue to reduce exposure; in two weeks, the stock has reached a new low. That 8% bounce was the dead cat, and not the turning point.
