Dead Cat Bounce: A Complete Guide

They say that what comes up must go down, but an equally true and less  discussed phenomenon is that what goes down must come up. At least,  sometimes.

The idea of a “dead cat bounce” might sound somewhat alarming, but as  long as you hear it mentioned within the context of trading, it refers  to a particular phenomenon in the stock market.

The phrase comes from the idea that even dead cats will bounce if they fall from a high enough point.

One extreme example of this is the dead cat bounce: when a stock price  decreases, it may seem to undergo a slight recovery before returning to  its previous low.

What is a Dead Cat Bounce?

A bounce happens when pessimism begins to set into a bear market.

What are the Causes?

If the market continuously displays a downward trend for weeks on end,  the conditions for a bounce begin to foster — and it’s made possible by  the way different traders act.

What are the Causes?

In the case of a bounce, the supply force is made up of the investors  who are shorting, while investors drive demand because they believe the  stock price is about to increase.

The Economics at Play

In retrospect, the route to profiting from bounces appears clear as  day. So why do so many traders get burned by them instead of profiting?

The Market Psychology

It’s partly because they’re blinded by short-term movements to notice the broader trends, and partially because they haven’t  mastered their emotions.

The Market Psychology

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