What is a Dead Cat Bounce?
A dead cat bounce is a term used to describe a sharp, short-term rise in a cryptoasset’s or market’s price that occurs in the middle of a longer-term downtrend.
The pattern is characterized by a significant price decline from a recent high, followed by a temporary price rise, then a bearish continuation of the downside trend.
The pattern gets its name from the saying, “Even a dead cat will bounce if it falls from a great enough height.”
The dead cat bounce is a bearish continuation chart pattern. Once it is completed (a price falls sharply, bounces quickly but fails to reattain previous highs, then continues to fall to new lows), further selling pressure in the short- to mid-term is often expected.
Dead cat bounce patterns are not limited to individual assets and can appear on broader market price charts, such as indices tracking a group of several companies or cryptoassets.
How to Spot a Dead Cat Bounce
Dead cat bounces are difficult to spot because they can be hard to initially differentiate from a major turning point and trend reversal of bearish market sentiment.
It’s only after the market gives back these short-lived gains and continues its further downtrend that traders are able to conclude that the brief, unsustained rally was indeed a dead cat bounce.
The temporary price increase that is a dead cat bounce often takes place in an area of strong technical support. Support refers to a lower price level where bullish traders accumulated a cryptoasset. These are often found at “psychologically significant” levels – often round numbers such as $10,000 or $500 – where many large buy orders are often placed.
After finding support, prices bounce until they reach an upper area of resistance (the opposite of support – a chart area where sellers exhaust all buy interest and a cryptoasset’s begins to fall). When the supply of current sell orders at a given price is more than sufficient to fill all the buy orders fuelling a cryptoasset’s rally, its price will reverse and begin to decline.
What Does a Dead Cat Bounce Indicate?
A dead cat bounce on a price chart most often signals that sellers continue to remain in mid- to long-term control of a market. You may hear it said that a market is “short-term oversold,” a condition in which a variety of technical indicators suggest a cryptoasset has simply fallen too far, too fast. A steep, unrelenting, multi-day price decline with little intraday upside price action is often the prelude to a dead cat bounce.
The pattern is confirmed when prices continue lower, falling below the level where the dead cat bounce price rally began. Eventually, another support level will be found at lower prices and buyers will once again outnumber sellers.
Whether this price appreciation is just another dead cat bounce or the start of a market’s longer-term recovery is only known in hindsight.
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Summary of Dead Cat Bounce
- A dead cat bounce is a temporary price reversal that occurs within a longer-term downtrend.
- In technical analysis, a dead cat bounce is a sharp but short-lived rally higher during a longer-term downtrend.
- Dead cat bounce patterns can only be confirmed after they occur and can be difficult to differentiate from longer term, more sustained uptrends in real time.