Expert Chaslau Koniukh
  • Companies
  • Global investment
  • Investors
  • Terminology
  • Economy
  • Stock Market
  • World exchanges
  • Tech and Marketing
dead cat bounce-2
Market terminology

The “dead cat bounce” pattern: what it is and the benefits of the strategy

27.02.2022
2 min read

When a dead cat bounce occurs in the market: peculiarities of the strategy

Brokerage activity has many nuances that must be taken into account when closing or opening trades. Specialists distinguish a number of important patterns, one of which is the cat bounce. It would be best to explain it with an example.
In a stock at the opening there is a drop of 5% or more from yesterday’s closing mark, with the price continuing to decline. After a while, the price drops 8%, after which a rally ensues. Some investors, who previously planned to buy shares, decide to open positions in order to buy securities at a discount of 5-8%. At the same time, the activity traders, who went into shorts in the morning, are covering their positions, which acts as fuel for the rebound. The price approaches the opening level, but the decline is still within 5%. Soon the price collapses again, as those traders who did not exit their positions exit the moment the price is near the opening value. This particular situation demonstrates a dead cat bounce.
The reason for this pattern is a gap down of about 5%. In general, the jump requires that the opening price is significantly different from the previous day’s closing value. If there is a stable volatility of the stock, then the gap value should be greater than 5%, otherwise this figure is enough.
Another important thing about the pattern is that the value should continue to fall for at least 5 minutes after the opening, ideally this period should be longer. If the price stops after the gap, then there will be no bounce.dead cat bounceSuch drops in the value of shares are observed as a result of the release of important news between trading sessions. Among them may be the publication of company reports, new laws.
Traders who use a dead cat bounce clearly watch the price movements and when it shows a bounce, go into a short. The reason for the short here is that the bounce won’t necessarily be long in time. The fact is that the stock has declined and investors are concerned, and a bounce serves as a great option for them to get rid of the securities. To that end, they drop the price even further. And it is in the trader’s interest to follow this process in order to have time to win and make a profit. An important point is the return of the value to the opening level, as it is likely to be a resistance point. At this time, it is necessary to open a short position, but it is better to take this step when the price resumes falling.
To track the onset of a dead cat bounce, you can use various stock screeners with current quotes. It is necessary to analyze those securities that have shown a big drop. It should be taken into account that the traded volume in the stock needs from 500 thousand, then they are suitable for transactions during the day.

Tags: Market terminology
0
Previous Post JPMorgan told when the U.S. is expecting an economic boom Next Post Analysts name investment options during the third pandemic wave

You Might Also Like

mean reversion
Market terminology
Mean reversion: features of a trading strategy
02.07.2021
Trader's tools
Market terminology
Trader’s tools: peculiarities of the order book use
23.04.2021
trust management in the securities market
Market terminology
Trust management in the securities market: types and advantages
19.11.2021
swing trading
Market terminology
Swing trading: essence of the strategy and its benefits
24.03.2021
trade risk
Market terminology
Trade risk for companies: types and ways to reduce damage
15.09.2020
offset
Market terminology
What offset means: application of the mechanism to stock exchange activity
22.12.2022

Recent Posts

  • 1Apple Search
    Apple Corporation is working on its own search engine, Apple Search
    28.01.2023
  • 2Tom Ford brand
    Estee Lauder made a deal to buy the fashion brand Tom Ford
    27.01.2023
  • 3Golden Visa
    The Golden Visa program has brought Portugal more than 6 billion euros during its existence
    26.01.2023
  • 4Michael Steinhardt
    Michael Steinhardt: the story of a prominent American investor
    25.01.2023
  • 5Cessna
    The Cessna aircraft company: how it all began
    24.01.2023

Popular Posts

  • Skolkovo analysts: the Russian energy market is suffering losses
  • Businessman Chuck Feeney: the man who gave the world Duty Free
  • Field of activity of the American Monsanto Company Corporation
  • Apple’s profit was record-breaking in the fourth quarter of 2019

Social media

Editor's Picks

Chaslau Koniukh
Analytics

American bankers from JPMorgan and Goldman Sachs advise to invest in gold: review by Chaslau Koniukh.

Press Secretary
17.08.2020
Expert Chaslau Koniukh
Analytics

Chaslau Koniukh on the analysts’ opinion on the key stake size change soon

Press Secretary
18.06.2020
expert Chaslau Koniukh
Analytics

Chaslau Koniukh: Internet trade market in Russia may reach 2.78 trillion rubles.

Press Secretary
30.05.2020
Will the U.S. oil shale industry be able to quickly recover from the crisis: A Review by Chaslau Koniukh
Analytics

Will the U.S. oil shale industry be able to quickly recover from the crisis: A Review by Chaslau Koniukh

Press Secretary
16.05.2020

Latest Posts

Apple Search
Apple Corporation is working on its own search engine, Apple Search
28.01.2023
Tom Ford brand
Estee Lauder made a deal to buy the fashion brand Tom Ford
27.01.2023
Golden Visa
The Golden Visa program has brought Portugal more than 6 billion euros during its existence
26.01.2023

Chaslau Koniukh

Expert Chaslau Koniukh

Chaslau Koniukh – an expert in marketing and project management, IT consulting, international investments, investor, financial analyst. A commodity trader, private consultant, entrepreneur, lecturer, author of several articles on the stock market.

Popular Posts

  • Skolkovo analysts: the Russian energy market is suffering losses
  • Businessman Chuck Feeney: the man who gave the world Duty Free
  • Field of activity of the American Monsanto Company Corporation
  • Apple’s profit was record-breaking in the fourth quarter of 2019
  • Dividends for 2019 will be paid: application of Moscow stock exchange
Expert Chaslau Koniukh
  • Facebook
  • Twitter
  • Instagram
  • Biography

Chaslau Koniukh – an expert in marketing and project management, international investments, financial analyst.

Social media

Menu

  • Biography
  • Companies and corporations
  • Global investment
  • Investors and Entrepreneurs
  • Economy
  • Market terminology
  • Stock Market
  • World exchanges
  • Tech and Marketing
  • Analytics