Dead Cat Bounce
: A Complete Guide
They say that what comes up must go down, but an equally true and less discussed phenomenon is that what goes down must come up.
The idea of a “dead cat bounce” might sound somewhat alarming, but as long as you hear it mentioned within the context of trading, it refers to a particular phenomenon in the stock market.
One extreme example of this is the dead cat bounce: when a stock price decreases, it may seem to undergo a slight recovery before returning to its previous low.
What is a Dead Cat Bounce?
If the market continuously displays a downward trend for weeks on end, the conditions for a bounce begin to foster.
What are the Causes?
In the case of a bounce, the supply force is made up of the investors who are shorting, while investors drive demand because they believe the stock price is about to increase.
The Economics at Play
Accept that you’ll never time the market perfectly (design a strategy that reflects this) — and that you don’t need to for success.
The Market Psychology
Following the initial crash in 1929, there was a 47% increase in stock prices from late 1929 right through to spring in 1930 — practically a full recovery.
The Great Depression
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