Dead Cat Bounce: What It Means & How To Spot It

If you’re new to the world of stock market investments, you might feel thrown by some of the lingo. Don’t worry, we’re here to help. In this guide, we’ll tell you all you need to know about the “dead cat bounce.” We’ll let you know what it is, what causes one, signs to look for, and more. Keep reading for a beginner-friendly breakdown of a crucial trading term!

Definition of a Dead Cat Bounce

Download Image

A graph depicting the brief recovery for the price of a declining asset, known as the dead cat bounce.

A dead cat bounce is a temporary price spike for an asset in the stock market right after a major decline. This spike is followed by a continued downward trend in the asset’s value. The phenomenon is known as a “sucker’s rally,” since the price spike can trap investors who think the value will continue to increase.

Section 1 of 7:

What is a dead cat bounce?

Download Article

A dead cat bounce is a stock's temporary price spike after a big decline. While it may appear to be a reversal, the downward trend resumes shortly after the price spike. You can typically only identify a dead cat bounce after it has already happened.^{[1]
X
Trustworthy Source

Financial Industry Regulatory Agency
Non-governmental organization responsible for regulating brokerage firms and exchange markets

Go to source}
- A dead cat bounce is a continuation pattern, or a pattern that signals that the preexisting market trend (a decline, in this case) will continue.^{[2]
  X
  Research source}

Section 2 of 7:

What does a dead cat bounce mean for investors?

Download Article

Investors who attempt to buy the dip during a dead cat bounce will end up with an asset that is continuing to decline in value. While there will be temporary relief, the eventual downturn will cause your portfolio to lose value.
If you already had a share of the declining asset when it crashed, a dead cat bounce can be an opportunity to cut your losses. However, since a dead cat bounce can only be identified definitively after the fact, this is tricky to accomplish.^{[3]
X
Research source}

Section 3 of 7:

Identifying a Dead Cat Bounce

Download Article

A dead cat bounce is part of a preexisting downward trend for an asset’s value. Look for lower highs and lower lows. The stock should already be strongly trending down.^{[4]
X
Research source}
A sharp drop can often lead to a reflex rally. If there’s been a high-volume of sell-offs following an existing downward trend, it’s possible a dead cat bounce will follow. Typically, the sharper the drop is, the more likely there will be a bounce.^{[5]
X
Research source}
As the definition states, a dead cat bounce is marked by a temporary increase in asset value. There will be a short period where the price bounces back up. It may bounce close to its previous high.^{[6]
X
Research source}
The rally in a dead cat bounce is short-lived, and the final sign that it’s occurring is the continued downward trend. After anywhere from a few days to several months, the asset value will continue to decline, indicating that it was a dead cat bounce and not a true rebound.^{[7]
X
Research source}

Section 4 of 7:

Limitations in Identifying a Dead Cat Bounce

Download Article

While you can try to predict a dead cat bounce, you can only say with certainty that it occurred when you analyze it in hindsight. Many financial analysts try to use statistical tools to predict dead cat bounces, but it’s not possible to be sure until there’s enough data for thorough financial analysis.^{[8]
X
Research source}

Section 5 of 7:

Dead Cat Bounce Examples

Download Article

Companies like Bitcoin and Ethereum were in bear markets (pessimistic market outlook) but experienced multiple bounces. There were rallies exceeding 20%, but the assets ultimately established new lows. This bounce and regression signals a dead cat bounce.^{[9]
X
Research source}
In the early 2000s, technology companies like Pets.com experienced dramatic bounces. Pets.com was already on a decline but experienced rallies of 50% or more before resuming their descent toward bankruptcy. This dramatic upswing before the crash is characteristic of a dead cat bounce.^{[10]
X
Research source}

Section 6 of 7:

What causes a dead cat bounce?

Download Article

This is when investors mistakenly believe an asset has hit its bottom and buy it. Investors do this right after a price decline in anticipation that the asset will rebound and increase in value, and it creates a temporary spike in the asset’s value.^{[11]
X
Research source}
These investors bet against a stock’s success and then buy shares to increase buying pressure for other investors. The spike in the market leads other investors to buy shares (even though the asset value will continue to decline) which creates a brief spike.^{[12]
X
Research source}
This can cause rapid price swings, even if an asset’s value will ultimately continue to decline. If investors catch wind of the possibility that a stock value will rally, they may invest and cause a short-lived spike in the stock.^{[13]
X
Trustworthy Source

Science Direct
Online archive of peer-reviewed research on scientific, technical and medical topics

Go to source}

Section 7 of 7:

Frequently Asked Questions

Download Article

1
Where does the phrase “dead cat bounce” come from? The term comes from the notion that even a dead cat will bounce if it falls from a great enough height. It was first used in the 1980s by the Wall Street analyst, Raymond DeVoe Jr.^{[14]
X
Research source}
2
What’s the difference between a dead cat bounce and a true reversal? A dead cat bounce is a temporary and brief recovery that comes before a continued downward trend. A true reversal is an actual shift toward a sustained upward trend for an asset. In a true reversal, the price action will have higher highs and higher lows.^{[15]
X
Research source}
3
Is a dead cat bounce a bullish or bearish pattern? A dead cat bounce is a bearish pattern. This means it is associated with a persistent downward trend in the value of a given asset and a pessimistic market outlook.^{[16]
X
Research source}
4
How can I avoid a dead cat bounce trap when I’m investing? When you’re investing, wait for confirmation of a true reversal before buying a share. Rather than buying just because of a random bounce, be more strategic in your investments. Some traders wait for volume (the number of shares traded) to confirm price movement or other fundamental developments that support recovery.^{[17]
X
Research source}