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Dead Cat Bounce: What It Means in Investing, With Examples

what is a dead cat bounce

Therefore, it is crucial to understand the risks involved, conduct thorough research, and consider seeking professional advice if needed. This historical example reinforces the need for caution when assessing market movements during periods of speculative bubbles. It highlights the importance of conducting thorough analysis and considering fundamental factors rather than relying solely on short-term price movements.

what is a dead cat bounce

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If technical stock analysis was reliably correct, then it would be easy to get rich by putting money into the stock market. Correctly identifying a stock price’s low point or the start of a price rally is tantamount to attempting to time the market. Investors are much better served by buying and holding the stocks of quality companies in order to sustainably build their wealth. A dead cat bounce is a price pattern that is usually recognized in hindsight.

Technical factors

Some investors might take this information to mean that the stock/commodity is over or undervalued after a sharp decline and hope for a quick rebound in the form of a V-bottom. Within a few weeks of that low point, however, Wells Fargo’s stock price had climbed to $33.91. The temporary price increase was probably triggered by the federal government’s first economic stimulus. At the time, significant uncertainty remained regarding the future of the banking industry. The name “dead cat bounce” is based on the notion that even a dead cat will bounce if it falls far enough and fast enough.

  1. The term “dead cat bounce” was coined on Wall Street in the early 1990s.
  2. However, the rest of the time, the price continues lower the next trading day.
  3. In the preceding RIVN dead cat bounce chart, the bounce occurred following the $15.28 bottom on January 19, 2023, to a peak of $22.09 on February 2, 2023, lasting 10 days, as indicated by 10 daily candles.
  4. For example, if you allocate some of your portfolios to bonds, you are ensuring that a portion of your invested assets is working independently from the movements of the stock market.
  5. The earliest citation of the phrase in the news media dates to December 1985 when the Singaporean and Malaysian stock markets bounced back after a hard fall during the recession of that year.
  6. The falling wedge comprises higher highs on bounces and higher lows on bounces, similar to the bear flat.

Common Mistakes in Identifying a Dead Cat Bounce

In this section, we will explore historical examples of dead cat bounces to gain a deeper understanding of how this phenomenon has manifested in various market conditions. By examining these real-world scenarios, we can uncover valuable insights and lessons that can be applied to our own trading strategies. While the price decline will occur over a relatively short period, the bounce could take significantly longer.

What Is the Opposite of a Dead Cat Bounce?

Click the link to learn what streetwise investors need to know about the metaverse and public markets before making an investment. During this new plunge, the price may decline approximately 30%, putting an average of 18% below the event low 60% of the time. Seventeen percent continue the trend into a third day, nine percent into a fourth day, and three percent into a fifth day. The average time between the beginning of an event decline and the price reaching a trend low is seven days. The average decline between the initial price gap and the trend low is 31%.

This leads to investors selectively choosing what information they believe as long as it supports their optimistic outlook for the chosen stock. Thus, they downplay the crucial negative information as rumour or unimportant. This image illustrates an example of when the overall sentiment of the market changed, and the dominant outlook became bullish again. We’d like to share more about how we work and what drives our day-to-day business.

Should many stocks within the same financial market show a positive trend, then the entire financial market may be favored by investors. A “bullish” market refers to a market which why is profit margin ratio important is predicted to undergo a positive price movement. Should an entire market experience an increase in demand, even stocks with a falling price can be positively benefited.

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