When Recovery Is Just a Mirage: Understanding Dead Cat Bounce in Trading

Community Submission - Author: Antonio

The financial markets have a peculiar way of playing tricks on traders. One such deceptive phenomenon is what Wall Street insiders call a “dead cat bounce” – a term that perfectly captures the temporary nature of certain price movements. Legend has it the phrase originated from the morbid but practical observation: even a lifeless feline will momentarily spring back up if dropped from sufficient height. Applied to markets, it describes those fleeting upswings that appear to signal a reversal, only to quickly fizzle out before the decline resumes with renewed force.

The Birth of a Trading Term

Back in early December 1985, Financial Times journalists Horace Brag and Wong Sulong were covering the turbulent financial markets of Singapore and Malaysia. A broker quoted by the journalists used this colorful expression to describe what was happening across these regional exchanges. At that moment, both economies were experiencing significant downward pressure, and what appeared to be recovery signals ultimately proved short-lived. The markets in these nations continued their descent and wouldn’t stabilize until years later. This incident marked the media’s first widespread adoption of the term, and it has remained a crucial vocabulary item for traders ever since.

How Dead Cat Bounce Works in Practice

For cryptocurrency traders and traditional market participants alike, recognizing a dead cat bounce is essential for portfolio protection. The pattern typically emerges during major sell-offs when a temporary price upturn catches the attention of hopeful investors. From a technical analysis perspective, this movement can momentarily resemble the beginning of a genuine trend reversal. The crucial distinction becomes clear over time: while a true reversal sustains its upward momentum, a dead cat bounce loses steam and fails to establish higher resistance levels. Instead, prices eventually break through previous support zones, creating fresh lows.

The Danger: Bull Traps and Emotional Trading

Understanding this continuation pattern becomes critical because of its association with what traders call a bull trap. During a dead cat bounce, the temporary recovery can convince market participants to take long positions based on the mistaken belief that the downtrend has ended. When the price fails to hold and resumes its descent, these traders find themselves locked into losing positions. This psychological trap has caught numerous investors and traders off guard, making education about these technical patterns invaluable for anyone navigating financial markets, whether traditional securities or digital assets.