A temporary recovery in prices after a prolonged decrease.
What Is a Dead Cat Bounce?
A dead cat bounce is a continuation pattern, i.e. after it takes place, the price continues moving in its prevailing long-term direction. The danger of this pattern is that it may at first appear as a reversal of the overall trend of an asset, leading bullish traders and investors to go long on it only for the price to continue falling afterward.
However, the peak of this phenomenon also presents an opportunity for traders to initiate short trades with the intention of taking profit when the asset resumes its fall.
While there are some methods of technical and fundamental analysis that allow trying to predict that the recovery is only temporary, it is a complex task with unreliable results. As such, they can only be definitively called after they have taken their course.
Unfortunately, many novice traders, especially in the crypto space, fall prey to dead cat bounces as they believe that the assets they buy are on their way to recovery. This is exacerbated by the crypto industry’s lack of regulation, which helps facilitate shady activities like front-running and price manipulation.
Therefore, it is important for analysts to observe the market further whenever an asset suddenly moves in an upward trend after a continuous decline since it doesn’t always indicate a bullish reversal, but could also be a dead cat bounce, which likely won’t recover to previous highs for a while.
It is always necessary to remember that these reversals aren’t actually reflective of the actual value of any financial asset but a reflection of the market’s collective psychology, which is chaotic and ever-changing. Precautionary measures should be observed before traders open new positions under any circumstances.