Dead Cat Bounce is a temporary recovery in a declining market, where prices briefly rise before continuing their downward trend.
What Is a Dead Cat Bounce in Trading?
A dead cat bounce is a quick rebound inside a bigger downtrend. It looks like the selloff is done, pulls in dip buyers, then the market rolls over and the down move continues.
The name comes from the dark joke that even a dead cat will bounce if it falls far enough. In markets, it’s the same idea: an asset that briefly rebounds after a sharp decline, then fades and makes new lows. Traders use the phrase to warn you that the bounce can be more trap than opportunity.
Why Dead Cat Bounces Happen: Market Psychology
A dead cat bounce is a continuation pattern, not a clean reversal. The first leg down is panic and forced selling.
Then you get a burst of optimism from short covering and bargain hunting, but it doesn’t last because the bigger sellers are still there. When that bounce runs out of fuel, the tape usually tells you the truth fast: sellers are still in control.
How to Spot a Dead Cat Bounce: 5 Key Signs
A legit dead cat bounce usually has five tells:
Brief Duration: The bounce is short, often 3–15 candles, then momentum dies.
Limited Recovery: It typically retraces less than 50% of the prior drop (Fibonacci helps here). A lot of them stall around 23.6%–38.2%.
Low Trading Volume: The rebound happens on lighter volume, which screams “no real sponsorship.”
Resistance Failure: Price runs into prior support that flipped to resistance, or gets rejected at common moving averages.
Increased Selling Pressure: The pattern “confirms” when price breaks back under the prior low and volume expands.
Why Dead Cat Bounces Matter for Risk Management
Spotting dead cat bounces keeps you out of nasty bull traps. The classic mistake is buying the first strong green push and assuming you caught the bottom, only to watch the market unwind and stop you out at the worst spot.
If the bounce is shallow, volume is weak, and resistance rejects the move, treat it like a relief rally until proven otherwise.
How to Trade a Dead Cat Bounce Pattern
Dead Cat Bounce Entries: Where Traders Look to Sell
The clean checklist starts with an impulse drop on heavy volume. Then you watch the bounce: if price lifts while volume fades, that’s your first warning.
Many traders map the bounce with Fibonacci retracements and look for failure around 38.2%–50%, because that’s where countertrend rallies often run into supply.
Two common ways to handle it:
Short the failure: Wait for price to stall at resistance and print rejection (shooting star, bearish engulfing, dark cloud cover), ideally with momentum rolling over. Entries are often cleaner on the break of the bounce structure or the next lower high.
Don’t force longs: If you’re not shorting, the best trade is often no trade—wait for real reversal evidence instead of trying to catch a falling knife.
Stops, Position Size, and Risk Rules for Dead Cat Bounces
If you’re shorting, stops matter more than being right. A common placement is just above the bounce high or just above the resistance zone that rejected price. Don’t size like it’s a normal market either—volatility is usually elevated, so smaller size makes sense.
Basic rules that keep you alive:
Risk 1–2% per trade, max. These setups can whip.
Trail once it moves your way, especially after the prior low breaks.
Take partials into obvious targets (prior low, then extensions like 127.2% and 161.8% if the trend accelerates).
For confirmation, the best combo is simple: rejection at resistance + momentum rolling over + volume expanding on the sell candles. When multiple timeframes line up, the odds usually improve.
How to Identify a Dead Cat Bounce Using Technical Analysis
You don’t identify a dead cat bounce in a vacuum—you identify it inside an established downtrend. The common look is a V-shaped or checkmark bounce that feels bullish, but the follow-through is weak.
Watch the top of the bounce for bearish candlestick signals like shooting stars, hanging man candles, or bearish engulfing patterns.
Momentum indicators help separate “oversold snapback” from real trend change. RSI often dips below 30, which can trigger a mechanical bounce. But if MACD shows bearish divergence (price up, momentum weaker), that’s a warning.
Stochastics also tend to struggle to hold above midline during these rallies. Meanwhile, volume usually contracts on the way up and expands when the downtrend restarts.
Support/resistance is where these bounces usually die:
Former support zones flip into resistance and cap the bounce.
Psychological levels like 50, 100, 200 often act like brick walls.
Fibonacci retracements commonly stall at 23.6% or 38.2% and rarely push cleanly through 50%.
Moving averages (especially 50-day and 200-day EMAs) often reject price on the first retest.
Volume analysis is usually the most honest filter. The old “volume precedes price” line matters here. If the bounce is on shrinking volume, then the selloff restarts with expanding volume, that’s about as close as you get to confirmation.
Trendlines and channels keep you grounded. If price can’t reclaim the upper boundary of the downtrend channel and keeps getting rejected, treat the bounce as a countertrend move until the market proves otherwise.
How Does a Dead Cat Bounce Form?
Phase 1: The Initial Selloff in a Downtrend
The initial downtrend phase is the damage. Some catalyst hits—missed earnings, ugly macro prints, risk-off in the index—and selling pressure snowballs. Support breaks, bids pull, and volume usually spikes as everyone rushes for the exit.
Momentum gauges often hit oversold because the move is so stretched. You’ll see lower lows stacking up, wide ranges, and a chart that starts looking “broken” as multiple support shelves give way.
Phase 2: The Relief Rally (The Bounce)
The bounce phase kicks in when the selling pauses and buyers show up for tactical reasons:
Short covering adds immediate buy flow as shorts lock gains.
Bargain hunters step in because the drop looks “too far, too fast.”
Relief rallies happen when the market runs out of sellers for a moment.
Technical oversold conditions pull in mean-reversion traders looking for a quick scalp.
The bounce can look like a clean V or a checkmark, but the giveaway is usually volume drying up as price lifts. That tells you the move is more mechanical than real accumulation.
Phase 3: Downtrend Resumes and Price Makes New Lows
The resumption phase is where the trap closes. Price runs into resistance—often the exact level that used to be support—and stalls.
Moving averages that used to act like a floor (50-day, 200-day EMAs) start acting like a ceiling.
Then the tone changes: volume expands on the red candles, and you’ll often see rejection prints like shooting stars or bearish engulfing near the bounce high. Once price breaks back down and pushes to new lows, the “reversal” narrative usually dies and trapped longs become forced sellers.
Why Dead Cat Bounces Happen: Trader Psychology
How Fear and Hope Create Bull Traps
The psychology is simple and brutal. First comes the panic phase: fear takes over, stops get hit, margin gets called, and selling becomes contagious. Eventually you hit a point where sellers are temporarily exhausted, which creates room for a bounce.
Then comes the false hope phase. Traders see a few strong green candles and start telling themselves the bottom is in. Recency bias makes the bounce feel more important than the trend, and confirmation bias makes every small positive headline sound like a turning point. “Buy the dip” becomes the story again.
That’s why it works as a bull trap. Real reversals usually come with sustained demand and better participation. Dead cat bounces usually don’t.
Institutions aren’t building positions; they’re often using the bounce to sell into better liquidity.
Finally, the renewed fear phase hits when price rolls over. Trapped longs puke, stops cascade, and the second leg down can be faster than the first because positioning is worse and confidence is gone.
Sentiment tools can help frame the backdrop—put/call ratios, VIX, even social chatter—but the main tell is still price + volume. If the crowd gets hopeful while the tape stays heavy, be careful.
Dead Cat Bounce Examples: Recent Market Case Studies
April 2025 S&P 500 and Nasdaq Tariff-Pause Rally
The S&P 500 dumped roughly 19% from the February highs into April 8, 2025, after “Liberation Day” tariffs sparked a broad selloff. Right after that, the Nasdaq ripped—up about 12% in a single session around April 9–10—when President Trump announced a 90-day tariff pause.
The question was whether that was a real turn or a dead cat bounce. The red flags were familiar: the S&P 500 struggled around 5,800–6,600, which acted like resistance instead of reclaimed support.
Volume didn’t scream strong institutional sponsorship, and prediction markets still priced elevated recession risk (59–68%), suggesting the fundamentals hadn’t meaningfully improved despite the tariff reprieve.
NVIDIA March 2022: 30% Bounce That Failed
NVIDIA is another clean dead cat bounce example. The stock slid from above $345 (late November 2021) to about $206 by March 8, 2022, with pressure tied to U.S. AI chip export restrictions aimed at China.
On March 15, 2022, it snapped back hard—about a 30% bounce toward $290.
But the bounce didn’t stick. Within about a month it rolled over and failed, with geopolitics and regulatory uncertainty keeping the stock under pressure. The rally was real, but it wasn’t a trend change.
Dead Cat Bounce Lessons Traders Should Learn
It’s easiest to label in hindsight: the market confirms it only after it fails and breaks lower.
Big green days don’t mean safety: a monster session can still be a countertrend rip.
Fundamentals still matter: real recoveries usually need real improvement, not just relief.
Resistance tells the story: if prior support rejects price, respect it.
Reps across markets help: you’ll see the same pattern in equities, crude oil, and Bitcoin.
Dead cat bounces show up everywhere—stocks, commodities, and crypto—because the driver is positioning and human behavior, not the ticker symbol.
Dead Cat Bounce Summary: Key Takeaways for Traders
The dead cat bounce is a temporary rebound inside a sustained downtrend. It’s usually powered by short covering, oversold mean reversion, and a quick relief bid—not by real accumulation.
Most of the time it’s defined by weak volume, failure at resistance, and then fresh selling that pushes price to new lows.
The edge comes from stacking signals. One indicator won’t save you. Put structure (downtrend + lower highs), volume (weak on bounce, strong on sell), momentum (divergence/rollover), and levels (support-to-resistance flips) all on the same chart and the picture gets a lot clearer.
Psychology runs the same loop: panic dump, hopeful bounce, then fear returns when the bounce fails. If you can stay objective through that middle “hope” part, you avoid most of the damage.
Dead Cat Bounce Trading Checklist
It’s a two-sided setup: potential short opportunity if you can manage risk, and a common trap for dip buyers.
Stops belong above the bounce high (or above the rejection zone), not in the noise.
Wait for confirmation: rejection + momentum rollover + volume expansion on the down candles is a strong combo.
Don’t confuse a rally with a reversal: in a bear trend, bounces are normal.
Continuation usually wins: until price reclaims key levels and holds them, assume the trend is still down.
Get good at spotting dead cat bounces and your decision-making improves across the board—cleaner entries, fewer emotional dip buys, and better risk control when markets get fast and ugly.
How can reviewing dead cat bounces in a trading journal improve your execution over time?
Because dead cat bounces are often confirmed only after they fail, the fastest way to sharpen your pattern recognition is to review your own examples. Logging each setup (trend context, bounce depth, volume behavior, where resistance rejected price, and how momentum rolled over) makes it easier to see whether you’re consistently buying the “hope” phase or waiting for confirmation. Over time, a trade journal also helps you quantify risk management: where your stops were placed relative to the bounce high, whether position size matched volatility, and how often partials or trailing rules improved outcomes. The goal isn’t to prove you were right, but to track decision quality and repeatable process metrics (PnL by setup type, win rate after specific confirmations, and average adverse excursion). A structured tracker like Rizetrade trading journal analytics dashboard for tracking setups, PnL, and performance metrics can make those reviews more consistent and comparable across markets and timeframes.