1. trading
A Dead Cat Bounce refers to a temporary recovery in prices during a prolonged bear market. It is a small, short-lived recovery in the price of a declining asset, such as a stock or cryptocurrency, followed by a continuation of the downward trend. The term is derived from the notion that "even a dead cat will bounce if it falls from a great height."
1.1
For instance, if a stock drops from $100 to $50 (a 50% drop), it might then recover to $75 (a 50% recovery), only to continue its downward trend afterwards. This temporary recovery is known as a dead cat bounce.
2. origin
The term "Dead Cat Bounce" originated from the financial markets and is often used by traders to describe a pattern in price charts. It is based on the morbid joke that even a dead cat will bounce if it falls far enough and fast enough.
2.1
The term was popularized by Wall Street traders in the 1980s. It's used to caution investors not to be fooled by a brief rally during a bear market.
3. identification
Identifying a dead cat bounce can be challenging as it requires predicting the future direction of price movements. Traders often use technical analysis tools, such as trend lines, moving averages, and volume indicators, to help identify potential dead cat bounces.
3.1
For example, a trader might look for a sudden increase in trading volume during the price recovery as a potential sign of a dead cat bounce. This is because a genuine market recovery is usually accompanied by high trading volume, while a dead cat bounce might not see as much trading activity.
4. multiple bounces
Sometimes, an asset can experience multiple dead cat bounces before the downward trend is reversed. Each bounce can give false signals that the downward trend is over, leading to potential losses for traders who buy in during these temporary recoveries.
4.1
During the 2008 financial crisis, many stocks experienced multiple dead cat bounces as their prices declined over several months. Traders who bought in during these bounces would have suffered losses as the prices continued to fall.
* All terms and definitions may update as the Cryptionary improves.
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