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Posted on 7 August 2011 | 4,990 views

So, What is a Dead Cat Bounce?

A dead cat bounce is the short rise in price of a stock which already suffered a fall is the standard usage of the term. In other instances the term is used exclusively to refer to securities or stocks that are considered to be of low value.

First, the securities have poor past performance.

Second, the decline is “correct” in that the underlying business is weak (e.g. declining sales or shaky financials). Along with this, it is doubtful that the security will recover with better conditions (overall market or economy).

Some variations on the definition of the term include:

  • A stock in a severe decline has a sharp bounce off the lows
  • A small upward price movement in a bear market after which the market continues to fall

The “Dead Cat Bounce” price pattern may be considered part of the technical analysis method of stock trading. Price patterns such as the dead cat bounce are recognized only with hindsight. Technical analysis describes a dead cat bounce as a continuation pattern that looks in the beginning like a reversal pattern. It begins with a downward move followed by a significant price retracement. The price fails to continue upward and instead falls again downwards, and exceeds the prior low.

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