Technical indicatorsTechnical indicators refer to technical analysis tools used by investors to make investment decisions based on future price movements derived primarily from historical prices. read more, experience, and time play a crucial role in determining whether a declining stock’s sudden upward movement is an actual recovery or instance of DCB. You are free to use this image on your website, templates, etc, Please provide us with an attribution link Article Link to be HyperlinkedFor eg: Source: Dead Cat Bounce (wallstreetmojo.com)
How Does Dead Cat Bounce in Stock Markets Work?The price pattern indicated on an index reflects the current status of the market. The ups and downs in the chart keep investors and money managers up to date. It also helps them make crucial financial decisions ahead. A bearishBearish market refers to an opinion where the stock market is likely to go down or correct shortly. It is predicted in consideration of events that are happening or are bound to happen which would drag down the prices of the stocks in the market.read more market is more prone to DCBs. Individual stock, overall market, options, etc., can be a victim of DCB. Let us understand the concept of dead cat bounce with a simple example.
It isn’t easy to differentiate between a DCB and actual recovery. DCBs can only be realized when they have occurred, but trading experts and analysts stay on the lookout. Technical tools, overall market performance, important news from the financial institutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more, experience, and time, are some ways to help understand the movement of DCB. For example, experts are cautious of market volatility in the aftermath of the Covid-19 that has left many economies in shambles. Conversely, an underperforming market loaded with economic debacles is more likely to incur a DCB. Also, for the price of any tradable asset to be considered for a dead cat bounce pattern, if a stock price lowers down to at least 5% of the opening price, it could be an indicator of the DCB. Even in the case of volatile stocks, the decline usually needs to be over 5%. ExamplesLet us go through some more examples of dead cat bounce to clarify the concept.
Causes of Dead Cat BounceAfter the steady lowering pattern, the short-term rise in the stock value could result from several factors. Here are a few points that could lead to a DCB: You are free to use this image on your website, templates, etc, Please provide us with an attribution link Article Link to be HyperlinkedFor eg: Source: Dead Cat Bounce (wallstreetmojo.com) #1 – Negative DominanceWhen bulls dominate the stock market, they make it economically sound. However, when the bears become dominant, the stock value downtrend leads to a steady decline. The bears are the pessimist investors who are suspicious of the market. They assume that the values will degrade in the coming times, and hence, they tend to change their purchase behavior. It leads to a rise in the value, forming a dead cat bounce pattern. The fluctuation observed in the trade market is quite a common phenomenon. But when a stock keeps declining continuously, leading to a steep low slope in the chart, certain investors become active. These investors are bear, short-term, short-sellers, and even some value investors. With the short position buyers increasing in number after a steady downtrend, a sudden rise in the stock prices is observed, leading to a DCB. #3 – Buying PressureThe momentum investors begin creating long positions post-analysis of the oversold readings. It enhances the purchase of the long stocks, thereby increasing the buying pressure leading to DCB. After a period of decline, the sudden increase in sales figures is reflected in a rise in the stock value. Recommended ArticlesThis has been a guide to What is Dead Cat Bounce and its meaning. Here we discuss how this type of stock pattern works and examples and causes. You may also have a look at the following articles to learn more –
|