What is Dead Cat Bounce?
Technical analysis is a statistical method that Bitcoin and other cryptocurrency investors use when take short, medium and long-term trading decisions. Investors interpret various structures formed on price charts with different scenarios. Each formation has its own unique form and movement. One of the formations seen in the price chart of a cryptocurrency in technical analysis is called the dead cat bounce pattern. It is a term used not only in the cryptocurrency market, but in the investment markets in general.
The origin of the terminology comes from the analogy that even a dead cat can jump back if it falls fast enough — although it’s a bit of an unpleasant analogy. Its emergence is based on the use of financial journalists in 1985 about a formation in the Far East market.
How to Identify Dead Cat Bounce?
This formation is formed during the downtrend of the cryptocurrency, when there is a temporary upward price movement against this trend. Thus, the downtrend is interrupted by this sudden but brief image of price rebound and then resumes.
It is difficult to determine whether a rise in the price chart is a dead cat bounce or a trend change. The formation of a dead cat bounce will only be noticed when this move is completed and the initial downtrend continues. For this reason, it is seen as a continuation pattern in technical analysis. This means that the dead cat bounce is only noticeable on the chart after it has occurred.
What Causes Dead Cat Bounce?
Identifying the lowest point along the trend on price charts is a difficult action in the ideal world. Traders who do technical analysis can point to different root causes as to what causes the dead cat bounce and try to identify that bottom point. This may not be wrong in general. Because the price chart of different cryptoassets can be affected by different parameters in different conditions.
⚠️ Important Notice: This article is not investment advice. The concepts used by the investors who apply the technical analysis method have been compiled from the literature and given in this article.
