How to identify a dead cat bounce in stock markets?
A dead cat bounce in stocks terminology means a brief recovery of a falling stock. Learn how to recognise a dead cat bounce in share market and how to trade in dead cat bounce.
Identifying a dead cat bounce in stock market is often very difficult. Most beginning traders in stocks fail to recognize a dead cat bounce pattern, misinterpret as an upward movement and hold their shares (or even buys more, for worse), only to watch in despair the prices going further down. In this article, we will help you learn how to identify a dead cat bounce in stock market and stay away from it, especially if you are a beginner and you know exactly what you are doing. Nevertheless, before we proceed to discuss how to spot this pattern, let us attempt a working definition of dead cat bounce in stock markets for those who are hearing this name for the first time.What is a dead cat bounce in stock markets?
A dead cat bounce in stock market often looks like a reversal pattern in the prevalent trend of decline, while in reality it is only a continuation pattern which can only be recognized with hindsight. The brief upward move shortly stops and the prices fall further to surpass the prior low.What are the reasons of a dead cat bounce in the market?
There are several factors that cause dead cat bounce in stocks. Almost every bear market on this planet goes through a time when even the most ardent bears reconsider their situations. With a market consistently finishing down over a month or two, most bears clear short positions. At the same time, some value investors may think that this is the full fathom five, and momentum investors find oversold readings in their indicators. All these factors make the market go up together by applying a buying pressure, even though for only a while.How to recognize a dead cat bounce pattern in stock market?
How to distinguish between dead cat bounce and stock market reversal?
Well, to be honest, there is no simple answer for this. At times, it is very difficult to tell whether it is a dead cat bounce or an actual market reversal. Patterns become clear only after the period is over, but then it is often too late to make any financial decisions. The only way to distinguish between market reversal and dead cat bounce is to use your experienced intuition and take calculated, educated risks. Nevertheless, these calculations still go wrong now and then. As a matter of fact, if everyone could successfully distinguish between dead cat bounce and market reversal, every trader would have made as much money as Warren Buffet did.
Courtesy: Investopedia, Investor Place, Wikipedia.
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