Dead‑Cat Bounce: What It Is and How to Spot It

If you’ve ever watched a stock tumble and then bounce back a little, you’ve seen a dead‑cat bounce. The name sounds funny, but the idea is simple: after a big fall, prices often climb a bit before falling again. It’s not a sign the market is back on track; it’s just a brief pause.

Investors love to talk about it because a dead‑cat bounce can trick people into thinking a downtrend is over. That’s why knowing the signs can save you from buying high and selling low.

Why It Happens

A dead‑cat bounce usually starts when panic sellers finally run out of steam. Some traders see the price so low that they think it’s a good entry point, and they start buying. This fresh demand pushes the price up a little.

Another driver is short‑covering. Traders who bet the price would keep falling need to buy the stock to close their positions. Their buying adds extra upward pressure, creating a short‑lived rally.

News can also spark a bounce. A positive earnings report or a rumor of a takeover can make people think the worst is over, even if the underlying fundamentals haven’t changed.

All of these factors are usually short‑term. Once the buying pressure fades, the original downtrend often resumes.

Tips for Investors

1. Check the volume. A real bounce often comes with higher trading volume. If the price climbs on low volume, it’s more likely a fake rally.

2. Look at the broader trend. If the overall market or sector is still trending down, a bounce in one stock may just be a blip.

3. Watch technical indicators. Tools like the Relative Strength Index (RSI) or moving averages can show whether the bounce is losing momentum.

4. Don’t chase the bounce. Buying just because the price is rising a bit can be risky. Make sure the company’s fundamentals still make sense.

5. Set clear stop‑losses. If the price falls back after the bounce, a pre‑planned stop‑loss can protect you from bigger losses.

Remember, a dead‑cat bounce isn’t a signal that a market crash is over. It’s a short‑term wobble that can trap impatient traders. By watching volume, trend, and indicators, you can decide whether to stay on the sidelines or take a cautious position.

In short, treat a dead‑cat bounce like a quick sprint, not a marathon. It’s a momentary lift that often fades fast. Knowing the why and how helps you stay calm and make smarter moves when the market wiggles.