Wednesday, August 10, 2011

What is a dead cat bounce?

After a sharp fall in prices, in a bear market, prices will sometimes begin sharp and swift rallies. Such rallies are called a 'dead cat bounce'.  The term suggests that the rally is likely to be a short term phase.

The term was created when day trading was not a trading feature. There were no computers or real time data. Positions were taken for days, weeks and months. After a bear market decline, prices would begin a rally, which was likely to face resistance sooner or later, hence a dead cat bounce.

The bounce then, did not refer to one day or a few hours. It referred to an upswing which was likely to fail. My point is this: How can we say that today was a dead cat bounce and the rally is complete? We should expect a short term uptrend. The bounce did not refer to one day, it referred to an up move that was likely to fail.

The up move from 4950 - low to whatever high is made is likely to be classified as a dead cat bounce, but it is not just one day.

1 comment:

Anshul The Maniac Finance Kid said...

sudarshan bhaiyya i still feel in todays world of tablet computers also,it is positional trading which rakes in the real money.Intraday trading just keeps some chutta paisa going and keeps u engrossed. Yes in positional calls some times gap openings play havoc but partially dey can be hedged by buying at money options. Please give ur views