In the financial markets a dead cat bounce is a small, brief rebound in the price of a stock, commodity, or currency that is in a long term downtrend. The mechanics of a dead cat bounce is that it stops going lower and puts in a short term low in price and then surges higher for a few days but this fails to continue to the upside and then resumes the downtrend and sets a new low in price in the chart timeframe being observed and then continues to go lower.
A ‘dead cat bounce’ can be triggered by a enough buyers rushing in too early to drive up the price, short sellers buying back their positions on the first sharp move lower creating buying pressure and a short squeeze as they lock in profits, or a lack of sellers willing to exit at the first low prices after the quick decline. These scenarios are all short term before the buying pressure is absorbed and the selling pressure resumes.
This metaphor originated from the idea that “even a dead cat will bounce if it falls from a great height”. This saying on Wall Street is used a lot in any situation when any business, market, or person has a brief resurgence during or following a severe decline in success or popularity.
A ‘dead cat bounce” is a short term temporary small upswing in price inside of a bigger long term downtrend in price.
