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Dead cat bounce
3 key takeaways
Copy link to section- A dead cat bounce is a short-lived recovery during a prolonged decline in asset prices.
- It often misleads investors into thinking the downtrend has reversed.
- Recognizing a dead cat bounce can help investors avoid premature investments.
What is a dead cat bounce?
Copy link to sectionA dead cat bounce is a market phenomenon where the price of a declining asset experiences a short-lived recovery before continuing its downward trajectory. The term is derived from the notion that even a dead cat will bounce if it falls from a great height, implying that the recovery is fleeting and not indicative of a true reversal in the market trend.
In the context of financial markets, a dead cat bounce can occur in any asset class, including stocks, commodities, or cryptocurrencies. Traders and investors should be cautious of such bounces, as they can create false signals that the market has bottomed out, potentially leading to premature buying decisions.
Characteristics of a dead cat bounce
Copy link to section- Temporary Recovery: The key characteristic of a dead cat bounce is that the recovery is brief. The price rise may seem significant, but it does not sustain, and the downtrend resumes shortly afterward.
- Volume and Volatility: During a dead cat bounce, trading volumes might increase as investors attempt to capitalize on the perceived recovery. Volatility is often high, reflecting the uncertainty and conflicting investor sentiments.
- Continued Downtrend: After the short-term rise, the asset’s price continues to fall, sometimes to new lows, confirming that the recovery was indeed a dead cat bounce.
Examples and implications
Copy link to sectionExample:
Imagine a stock that has been in a downtrend due to poor earnings reports. At some point, the stock price rises sharply for a few days due to a minor positive news item or technical factors. Investors might perceive this as a recovery, but the stock soon resumes its decline, falling even further than before.
Implications:
- Investor Caution: Investors need to be wary of dead cat bounces to avoid making premature or ill-timed investment decisions.
- Technical Analysis: Traders often use technical analysis tools and indicators to distinguish between a true market reversal and a dead cat bounce.
- Risk Management: Proper risk management strategies, such as setting stop-loss orders, can help investors mitigate losses if they mistakenly invest during a dead cat bounce.
Related topics
Copy link to sectionFor further reading, consider exploring the following topics:
- Market Corrections: Understanding how market corrections differ from dead cat bounces.
- Bear Markets: The broader context of prolonged market declines and their characteristics.
- Technical Analysis: Tools and techniques used to analyze market trends and identify potential dead cat bounces.
- False Breakouts: Similar market phenomena where price movements mislead investors into expecting a trend change.
Recognizing a dead cat bounce and understanding its implications can help investors make more informed decisions and avoid potential pitfalls in volatile markets.
More definitions
Sources & references

Arti
AI Financial Assistant