The trap of mistaking a brief, automatic rebound after a sharp drop for a genuine reversal. The bounce fails, selling resumes, and price breaks to new lows. Even a dead cat bounces if dropped from high enough.
A dead cat bounce is the phenomenon where a brief rebound right after a sharp decline is easily mistaken for a genuine bottom and reversal.
The name is brutally direct. The market adage runs: "Even a dead cat bounces if you drop it from high enough." A bounce does not mean the cat came back to life. The energy of the fall simply rebounded off the ground, and the cat soon goes still again.
Price behaves the same way. After a sharp drop, it springs back with conviction. Many participants pile in, sure that "this is the bottom, the reversal." But the rebound does not hold. Selling resumes, the prior low gives way, and price grinds lower.
This is less a chart pattern than the deceptive rebound that inevitably appears partway through a downtrend. Unlike a head and shoulders or double top, which carry clear necklines and measuring formulas, the subject here is not the shape itself but the judgement: is this rally real, or is it a dead cat?
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