What is a dead cat bounce?
Why does this work? The idea is that you have a large company which takes a big hit from some bad news or other event. As a result the price of the stock plummets to a new low. Value investors see this stock which has taken such a big hit and attempt to get in it in hopes of buying the stock at a low point. All of this added buying pressure pushing the stock back up a little before it continues its trend, usually to the downside.
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 if it happens. If it doesn’t happen most traders will have some sort of a risk management strategy to get out of the stock before they ride it downhill. Other Chart Patterns There are other chart patterns with more precise targets. Below are a few examples of them. Head and Shoulders - A bottoming pattern that can take months or weeks to forum Bump and Run - A trend reversal pattern Triple Bottom - A bottoming pattern |
