What is a Dead Cat Bounce Pattern?
A dead cat bounce is a short-lived rally inside a downtrend that fails fast and rolls right back into the selloff. It involves a sharp drop, a brief relief pop, and then a continuation lower once sellers take control again. The name says it all — even a dead cat will bounce if you drop it from high enough. Doesn't mean it's alive.
What Does a Dead Cat Bounce Pattern Indicate?
It tells you sellers paused — not that they're done. Shorts covered, dip buyers stepped in, and price popped. But supply still owns the tape. When the bounce hits resistance, the same sellers come right back.
The pop is positioning and relief. Not real demand. That's why the next leg lower usually shows up the moment trapped longs figure out the rally was bait.
Is the Dead Cat Bounce Pattern Bullish or Bearish?
Bearish. Every time. It's a downtrend continuation pattern wearing a recovery costume — trapping dip buyers and rewarding shorts who wait for confirmation. If you're long, you're on the wrong side of the setup.
How to Identify a Dead Cat Bounce Pattern?
Look for three things: a violent selloff, a weak bounce that stalls at resistance, and a rollover into fresh lows. If the bounce can't reclaim what broke, you're staring at a dead cat.
- Trend context: clear downtrend with lower highs and lower lows.
- Impulse drop: fast decline with wide-range candles and expanding volume.
- Relief rally: a bounce lasting a few candles to a few weeks that recovers only part of the drop.
- Failure area: rejection at prior support turned resistance, a declining 20 or 50 moving average, or a downtrend line.
- Confirmation: breakdown under the bounce's short-term support, then a push below the prior swing low.
How to Draw a Dead Cat Bounce Pattern?
Mark the impulse low, the bounce high, and the resistance zone capping the rebound. Then box the bounce structure so the breakdown level is obvious before it happens — not after.
- Draw a resistance zone at the prior support shelf that broke during the selloff.
- Mark the impulse low (the swing low from the first selloff).
- Mark the bounce high (the relief rally peak), and connect any lower highs to map the countertrend channel.
- Draw bounce support across the higher lows inside the rebound — that's the level that breaks when the bounce fails.
How to Trade a Dead Cat Bounce Pattern?
Short the failure, not the rally. Let the bounce hit resistance, let it roll over, then enter when price closes below the bounce's own support. Shorting the highs without confirmation is how you get squeezed.
- Entry trigger: bearish rejection at resistance followed by a candle close below bounce support or the most recent higher low of the rebound.
- Confirmation: expanding volume on sell candles and momentum rolling over (lower high in RSI or MACD while price tests resistance).
- Alternative entry: short the retest (throwback) into broken bounce support after the breakdown closes.
What is the Profit Target for a Dead Cat Bounce Pattern?
The first target is the prior swing low. The second is a measured move — the height of the bounce projected down from the breakdown level.
- Target 1: the impulse low that started the bounce.
- Measured move: (Bounce high − Bounce low) subtracted from the breakdown price.
Example: Price drops to $80 (bounce low), rallies to $92 (bounce high), then breaks down at $84. Bounce height is $12. Measured target: $84 − $12 = $72.
Where to Put a Stop Loss on a Dead Cat Bounce Pattern?
Stop goes just above the bounce high or just above the resistance that rejected the rally. A clean reclaim of that level invalidates the entire short thesis — close the trade and don't argue with it.
- Conservative stop: above the bounce high (the relief rally peak).
- Tighter stop: above the rejection swing high if you entered the breakdown right after a clear reversal candle at resistance.
- Mechanism: place the stop beyond the level, not on it. Sitting your stop right at the high is asking for a liquidity sweep.
What Happens After a Dead Cat Bounce Pattern?
Three things can happen. Price accelerates lower into a continuation leg, retests the broken support and rolls over again, or the setup fails outright when buyers reclaim resistance and hold above it.
- Follow-through: breakdown expands as sellers press and late longs liquidate.
- Retest behavior: price snaps back to broken support, prints a lower high, then sells off again.
- Failure mode: a strong reclaim of the resistance zone turns the "bounce" into a base and forces shorts to cover.