Remember that student in 8th grade, who used to fail every exam, but managed to pass in that one science test. Although he again went on to follow his streak of failing after that.
Yes, that is exactly how we are going to understand the concept of dead cat bounce.
The term "dead cat bounce" refers to a circumstance where a security or index enjoys a brief upsurge in movement during a generally negative trend. After a significant correction or downward trend, there is a short-term price increase for an asset or an index.
The name comes from the expression that even a dead cat would bounce if dropped from a great height.
Not clear?
Let us consider an example.
Consider a security priced at ₹100. The security has had a significant correction during the last six weeks, bringing the price to ₹40. The stock moves up in the seventh week, reaching ₹60; but, the next week, it declines to ₹20. The price increase in the seventh week will be referred to in the future as a "dead cat bounce."
It is used to describe a stock market trend that cannot continue and will eventually fail. A dead cat bounce happens when the price of a stock or other asset increases swiftly before falling just as quickly. This often occurs when the stock or asset lacks any actual underlying strength.
It is a pricing pattern that stock analysts use to assess whether a spike in a stock's price following a significant correction represents a change in the downward trend or is merely a dead cat bounce.
The greatest worry with the dead cat bounce is that it cannot be accurately identified until it is examined in hindsight.
A dead cat bounce pattern may be mistaken for a broad trend reversal in its early stages. But eventually, the price stagnates and the downward trend persists, shattering earlier support levels and setting new lows.
READ MORE: 18 basic stock market terms a beginner must know
Although many financial experts attempt to utilize statistical methods to predict such an event and avoid unfavorable investment outcomes, it is impossible to be certain until enough time has passed and there are enough data for thorough financial and economic study to specifically name a dead cat bounce.
Short-term traders typically benefit from the opportunity since it gives them a chance to profit from the brief surge. Investors may take advantage of the incident to open short positions in the securities.
