RiskPicksWhat is a Dead Cat Bounce?
A dead cat bounce is a temporary, short-lived recovery in the price of a declining stock. The name comes from the idea that "even a dead cat will bounce if it falls from a great height." The key: the bounce doesn't last.
Characteristics
- Occurs after a sharp, significant drop (often 10%+)
- Bounces on lower volume than the selloff
- Typically retraces 20-50% of the drop before rolling over
- Sellers use the bounce to exit at better prices
How to trade it
Short sellers look to enter on the bounce, setting stops above the bounce high. This is an advanced strategy: the bounce can extend further than expected, especially if the original selloff was overdone.