What is a Dead Cat Bounce?

What is a Dead Cat Bounce?

A dead cat bounce is a brief, temporary price recovery within a larger downtrend that quickly fades and resumes the decline. The term comes from the dark Wall Street saying that "even a dead cat will bounce if it falls from a great height." These bounces trap optimistic traders who mistake short-term relief for a genuine reversal, only to see their positions underwater when the downtrend reasserts itself.

Identifying Dead Cat Bounces

• Sharp preceding drop: The bounce follows a steep, panic-driven sell-off where price declines rapidly
• Short-lived recovery: The rally lasts only days or weeks before momentum fades and selling resumes
• Weak volume: Buying volume during the bounce is significantly lower than selling volume during the decline
• Resistance capping: Price fails to break through key resistance levels or moving averages
• Fundamental weakness persists: The macro environment, earnings outlook, or economic data remains bearish despite the bounce

Trading Dead Cat Bounces

• Wait for real confirmation: Require trendline breaks, higher lows forming, and moving average reclaims before turning bullish
• Fade the bounce: Experienced traders short into resistance levels during the bounce with tight stops above key levels
• Monitor fundamental catalysts: Watch for news that could genuinely shift sentiment rather than just technical relief rallies
• Keep position sizes modest: Dead cat bounces can be violent and unpredictable. Size positions accordingly

Psychology Behind the Trap

Dead cat bounces exploit fear of missing out (FOMO) and recency bias. After a steep decline, traders desperately want to believe the worst is over and rush to buy the "bottom." This provides liquidity for smart money to exit remaining positions before the next leg down. The bounce also triggers short-covering from bears taking profits, adding temporary buying pressure that quickly exhausts.