In this article, you will learn what is the meaning of dead cat bounce. The price pattern indicated on an index reflects the current status of the market. The ups and downs in the chart keep investors and money managers up to date. It also helps them make crucial financial decisions ahead. A bearish market is more prone to dead cat bounce.
What is the Meaning of Dead Cat Bounce?
A dead cat bounce is a temporary, short-lived recovery of asset prices from a prolonged decline or a bear market that is followed by the continuation of the downtrend. Frequently, downtrends are interrupted by brief periods of recovery—or small rallies—during which prices temporarily rise.
The name "dead cat bounce" is based on the notion that even a dead cat will bounce if it falls far enough and fast enough. It is an example of a sucker's rally.
A dead cat bounce is a price pattern used by technical analysts. It is considered a continuation pattern, where at first the bounce may appear to be a reversal of the prevailing trend, but it is quickly followed by a continuation of the downward price move. It becomes a dead cat bounce (and not a reversal) after the price drops below its prior low.
What are the Causes of Dead Cat Bounce?
After the steady lowering pattern, the short-term rise in the stock value could result from several factors. Here are a few points that could lead to a DCB:
– Negative Dominance
When bulls dominate the stock market, they make it economically sound. However, when the bears become dominant, the stock value downtrend leads to a steady decline. The bears are the pessimist investors who are suspicious of the market. They assume that the values will degrade in the coming times, and hence, they tend to change their purchase behavior. It leads to a rise in the value, forming a dead cat bounce pattern.
– Clearing Out
The fluctuation observed in the trade market is quite a common phenomenon. But when a stock keeps declining continuously, leading to a steep low slope in the chart, certain investors become active. These investors are bear, short-term, short-sellers, and even some value investors. With the short position buyers increasing in number after a steady downtrend, a sudden rise in the stock prices is observed, leading to a DCB.
– Buying Pressure
The momentum investors begin creating long positions post-analysis of the oversold readings. It enhances the purchase of the long stocks, thereby increasing the buying pressure leading to DCB. After a period of decline, the sudden increase in sales figures is reflected in a rise in the stock value.
Bottom Line
When markets drop, a relief rally may cause investors to think that the worst is over. However, it could just be a dead cat bounce. This article is about what is the meaning of dead cat bounce.
