Before you know how to look for a dead cat bounce approaching in the stock market, it is paramount that you know exactly what a dead cat bounce refers to, and how to look for trends that could signify that one might be approaching.
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A dead cat bounce, similar to what the name suggests, refers to a short term period in the stock market that things start to get better. What is meant by this is, if a stock in the stock market has been on a long decrease over a period of hours, days, or weeks, a dead cat bounce is the period of time for which this improves – no matter how long it may be. However, a dead cat bounce is never usually long period of time – the market usually tends to return back to its previous lower state relatively quickly. A dead cat bounce does not necessarily refer to the stock market as a whole however – it usually refers to the short time that a failing or plummeting stock gets into a better state. A stock that has not been successful for a period of time is inevitably going to improve for a short period of time at some point in its life – this is the dead cat bounce (the short period of time for which the plummeting stock improves).
In short, a dead cat bounce is a stock that is temporary going through a better price point. They are quite common in the stock market, and they should not be mistaken for a stock that appears to be on the rise.
A dead cat bounce is not all bad however – even though the stock price that is experiencing it will decline once again very shortly. It can be a good thing in many respects:
They can tell you what’s going on in a certain area of the stock market and why – a dead cat bounce can tell you which areas of the market are at their strongest, and also which areas of the market are at their weakest. For example, if there is an area of the market called area A (could refer to any type of stock but we will use “area A” for the purpose of this example) and a stock in area A happens to experience a dead cat bounce, this can signify that this area of the market is weak at a certain point in time. It can help to inform you of what is best to do with other stocks that you may hold in area A of the market as they too could experience, or are more likely to experience, a dead cat bounce in the near future. Whilst a dead cat bounce might not have a great effect on one of your stocks in particular, it could help inform you as to what you would like to do with other parts of your holdings before they too experience losses. Based on the information that you obtain on why the dead cat bounce has occurred, you can plan into the future and examine the techniques that are best, as well as those trading techniques that should be avoided.
They can present an opportunity! It is, believe it or not, possible to gain something good from a dead cat bounce. If you have been/were considering purchasing a certain stock that is now experiencing a dead cat bounce, now is your chance to buy the stock at what will most likely be one of its lowest prices either to date, or ever! However, this requires on you having the knowledge on how to notice a dead cat bounce coming – in that you will need to know when exactly is the best time for you to purchase the stock, and then you need to know when the dead cat bounce is happening (not quite as hard to spot), and quickly sell your holdings in that stock during this brief time. It is important to remember that, although a dead cat bounce can be a good time to sell, it is not a good idea to rely on a dead cat bounce happening on a stock in order to make money – as there is every chance that one will not occur and that your stock will instead continue to decline.
If you analyse closely and over a long period time the price fluctuations of a stock, and more particularly the times at which it experiences a dead cat bounce and under the conditions which it does, it may become more easy for you to anticipate when they are going to occur in the future as a dead cat bounce is sometimes not something that only happens once to a stock. If you do successfully manage to identify a trend in that you know roughly when the next dead cat bounce on a stock is coming and you know which price points are likely to be the lowest, you could be putting yourself in a good position in that you will know when is best to buy and sell a security – resulting in profit!
So, how do you anticipate a dead cat bounce approaching? In order to anticipate a dead cat bounce, it is paramount that you analyse closely the activities and movements of the stock in question. You need to look at why these activities and movements take place at the times that they do, and more specifically what activities/events cause certain movements to take place in the price of the stock. For example, some things will cause the price of the stock in question to rise, whilst others will cause the value of the stock to fall drastically. If you are able to identify these, you will be in a better position to see anticipate when a dead cat bounce might happen as you can base your prediction on an event that has taken place that you know to cause a rise in the price of the stock. In order to anticipate a dead cat bounce, you must compare your knowledge of the stock and what affects it closely with a stock chart, and make your predictions based on these!