What is a Dead Cat Bounce?

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What is a Dead Cat Bounce?

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The characteristics of the pattern are: 1. Down gap of at least 20% on unusually high volume, at least 3-4 times the daily average. The average drop for this pattern is between 30-40%. The bigger the gap, the bigger the possible bounce. But there is more downside to come more often the larger the gap. 2. The price drops then followed by a bounce, anywhere from the following day to the next few days. If the bounce doesn’t come within a week, but continue going down. The bounce will likely to be small, if there is ever one coming. 3. Prices may reach to where the gap began but does not go higher than that price range. When prices do bounce, the expected price target is usually where the day before the down gap began. Most bounces will not make that far. But for those that do, they will usually reverse and start downward again. 4. Duration of the downtrend may continue from 3 to 6 months, depending on the stock and the market condition. The average is usually an additional 15-25% price dr

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The dead cat bounce is a reference to a short period of recovery for a given security. While there may be a temporary and modest rise in stock price for the security, the momentum quickly ceases and the price either levels out or begins to drop again. Generally the degree of increase in the price of a stock is limited, and may involve a stock that was not considered favorable in the first place. While the short period of increase followed by the decline of a stock is the essential nature of a dead cat bounce, the term is not applied to all stocks that follow this pattern. Generally, the term is only used with securities that are considered to be of low value under the best of circumstances. When a low valued stock enjoys a brief upswing in value for a short period of time and then returns to the previous and unspectacular price level that is the norm, the bounce is considered nothing more than an aberration and thus not of any real interest to serious investors. While the name for the

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As you can see, the markets took a serious beating during this six-week period in 2000. As gut-wrenching as this was, it was not a unique occurrence in financial history. Optimistic periods in the market have always been preceded and followed by pessimistic or bear market conditions, hence the cyclical nature of the economy. However, a phenomenon unique to certain bear markets, including the one described above, is the occurrence of a dead cat bounce. After declining for six weeks in a row, the market showed a strong rally. The Nasdaq in particular posted gains of 7.78% after a disappointing string of losses. However, these gains were short lived and the major indexes continued their downward march. This chart illustrates just where the cat bounced, how high it bounced and then how far it continued to fall.

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