What is a dead cat bounce?
The dead cat bounce is a very quick pattern. It occurs after a giant down day in a stock caused by a news event. On the couple days following that drop it is expected to go up a little. The pattern gets its name from an old stock saying, “even a dead cat will bounce if it is dropped from high enough”.
Volume The volume is expected to be extremely high during the news event and is expected to remain high for the bounce upward. It may die down after the bounce however. Target The target of a dead cat bounce is said to be 19% of the fall. In this example the stock fell from $3.40 to $2.06. This gives us a fall of $1.34. 19% of that is $.25. So our target would have been $2.31. This stock went a little higher than that. Trading the pattern A trader may trade the pattern by buying directly after the bounce and expecting a small bump upward. They should be extremely careful and use strict risk management because the stock could have another big down day. They should also realize that the bounce will probably only last 1 or 2 days.
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