Dead Cat Bounce
Even dead cats bounce, the saying goes. But what does it have to do with financial markets? It turns out, quite a lot actually.
This colorful term describes a situation, in which the security attempts to counter the preceding sharp move to the downside. Starting as brief, the recovery attempt gives an impression of a reversal-in-progress before running out of steam. Progressing, it can retrace a significant part of the preceding decline. As it eventually rolls over, new lows are made.
Let’s check one of the most memorable dead cat bounces in gold.
Dead Cat Bounce in Gold
Dating back to 2013, the yellow metal truly plunged in two days like there was no tomorrow. Compared to the slide’s momentum, the recovery took quite some time. Though it retraced a sizable part of the slump, the rally was in the end unable to keep its momentum, and stalled. It wasn’t a, and the following chart shows how deeply gold fell before June 2013 was over.
As you have seen, a dead cat bounce is a continuation pattern more than anything else. And little wonder, as it can be found most frequently within the context of a bear market, or marking both a brief and feeble response of the bulls to a remarkable downside move.
Either way, the upside gets reversed, and a new move to the downside follows.
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