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The dead cat bounce
"Even a dead cat bounces if it falls far enough." A sharp rally inside a downtrend feels like the bottom, and often isn't. Knowing the difference saves a lot of money.
Why it happens
After a hard drop, a bounce is almost mechanical: short-sellers take profits (buying to cover), bargain-hunters step in, and oversold indicators snap back. That buying lifts price briefly, but if the reason for the decline hasn't changed, sellers return and the downtrend resumes.
Bounce vs. real reversal
- Volume. A durable low usually reverses on heavy volume; a dead cat bounce fades on weak, declining volume.
- Structure. A real reversal builds higher highs and higher lows; a dead cat bounce fails at prior support-turned-resistance and rolls over.
- Catalyst. Reversals usually have a reason (news, a policy shift). A bounce with no change in the story is suspect.
The honest catch: it's only certain in hindsight. In real time a dead cat bounce is indistinguishable from a genuine bottom, you can only confirm it after price rolls over and makes a new low. That's exactly why it's a trap, and why chasing the first sharp rebound is so dangerous.
The practical rule. You don't have to catch the exact bottom. Wait for confirmation, a higher low, a reclaim of a key level on volume, rather than buying the first green candle in a downtrend.
Reference: Investopedia, Dead Cat Bounce.
Educational market information, not financial advice. Markets carry risk of loss, do your own research.