What is a dead cat bounce and how to trade it?

A dead cat bounce is a pattern primarily used by technical analysts. To identify a dead cat bounce, traders and analysts have to determine with adequate certainty if a rally after a long decline is short-lived or permanent. The question arises what causes a dead cat bounce?

Which stocks have the sharpest V-shared dead cat bounces?

Stocks that make a very steep and lasting sell-off that conclude with a large reversal candlestick like a hammer or doji with a long tail indicating panic and capitulation tend to get the sharpest V-shared dead cat bounces.

Can directional bias help traders spot a dead cat bounce?

Coming in the midst of a sharp period of weakness, the existence of an established directional bias should help traders spot a dead cat bounce. The utilisation of both fundamental and technical analysis can help traders understand whether we are set for another leg lower or a wider recovery.

When was the 'Dead Cat Bounce' first used on Wall Street?

The phrase has been used on Wall Street for many years. The earliest use of the phrase dates from 1985 when the Singaporean and Malaysian stock markets bounced back after a hard fall during the recession of that year. Journalist Christopher Sherwell of the Financial Times reported a stock broker as saying the market rise was a "dead cat bounce".