The financial market is a dynamic environment that goes through ups and downs in cycles. The…
Dead cat bounce sounds spooky! It seems like the title of a Stephen King movie.
But, before you get spooked, dead cat bounce is an essential addition to your continuously widening crypto vocabulary and slang. It will be useful later on when you are close to being an expert in your crypto journey.
This blog post will try to simplify and explain the concept of dead cat bounce and why it matters in your cryptocurrency trading.
Dead Cat Bounce Definition
The term dead cat bounce refers to the phenomenon of a short-lived and temporary recovery in the prices of assets during a bear market. This price recovery is only for a short amount of time because a downtrend quickly happens after.
Before cryptocurrency exploded, it was a popular term in the stock market. But since cryptocurrency is volatile, the phenomenon is also observable for digital assets.
Dead Cat Bounce Origin
This rather strange expression comes from the concept of “even a dead cat will bounce if it falls from a great height.” This was a common idea in the Wall Street community. They usually applied it to events where they observed a minor comeback in assets during the period of great financial decline.
This term was first used in early December of 1985 when Financial Times journalists Wong Sulong and Horace Brag quoted one broker who said: “this is what we call a dead cat bounce.” The said broker was talking about Singapore and Malaysia’s financial markets that exhibited signs of recovery after a continuous downtrend. However, that short time of recovery soon turned into a steady decline.
Dead Cat Bounce Meaning
Identifying an asset’s dead cat bounce is essential in determining if it will continue its price increase. If a trader previously sold a particular stock short and sees that the increased price is just a bounce, he may want to maintain the short position. On the contrary, if the price movement seems to be sustainable, the trader may opt to close the short order.
Also, this is a price pattern that is usually recognized only after it happens. Financial market experts predict that it will be short-lived by using a variety of fundamental and technical analysis tools.
Sometimes when the pattern happens, people confuse it for a general trend reversal. Only after a steady decline happens that investors recognize the pattern that occurred.
In addition, this price pattern may sometimes lead to a bull trap. It is a situation where investors take long positions in hopes that a trend reversal will take place, but it never happens.
Spotting a Crypto Dead Cat Bounce
Compared to other price patterns, identifying a dead cat bounce pattern is fairly easy. When a digital asset’s price declines within a short period of time. Then, the price rises on the next day because many investors want to buy the dip. The jump it experiences is short-term and it will resume the downward movement.
This behavior in market price can last from a few minutes to a month. It normally takes place after a popular financial authority or company publishes their economic data and earnings release. Aside from big news about the financial status of an asset or crypto company, negative news can also trigger a dead cat bounce like a CEO’s resignation or a popular product’s flop.
Three Essential Features of a Dead Cat Bounce
Investors must always be wary of a it. Like any other continuation pattern, it influences the decisions of traders. Here are three essential things that investors need to remember.
First, it is not sustainable. The price increase is not for the long term. It will go back to its normal downward pattern. Thinks of it as a temporary relief from the bearish market condition.
Second, the bounce can deceive you into thinking that the increased price will last a long time. It also gives you false hopes that you can change your trading position.
Third, when you have enough experience in investing and trading, you can turn this into an opportunity if you buy cryptocurrencies at the right price and right time. Usually, the right time is the moment before its prices decline again.
The bounce happens because investors try to save their positions and stop their losses. It is only a temporary recovery and greenhorns in the crypto space should not be in a rush to build up their portfolios during this time.
Always observe precautionary measures and conduct a thorough analysis before deciding what trading position you want to take in a bear market.