Currently, we are hearing many traders calling the current rally in Bitcoin a dead cat bounce scenario, stating that the bearish trend in the crypto market is being interrupted by a small price recoveries, but these price increases are only temporary. This is possibly due to the result of the investor or traders that are buying or closing their short positions due to the assumption that the security has already reached the bottom. This has been reported on recently where bitcoin shorts have reached a yearly low after sudden drop of 20, but traders such as Joel Kovschoff of Athena, an OTC, and Algorithmic crypto trader believes we are in a dead cat bounce scenario.
Dead Cat Bounce is in essence, merely a pattern that can be identified in perception after the fact. Attempts to identify a dead cat bounce are about as viable and accurate as identifying when a stock or any other underlying instrument has topped, and the trend will pivot and reverse direction. It is pure luck if you can do this. Analysts can try to predict that this recovery will somehow be temporary by using fundamental analysis and technical tools. What is a Dead Cat Bounce? Let's look at real dead cat bounces in other markets.
Cat Bounce can be defined as a temporary recovery experienced by the market after the extensive decline. A dead cat bounce’ can also be seen as a bear market which will be succeeded by the continuous downward trend. For instance, let us look at the year 2000 when the market took a beating for a period of six weeks. The cyclical nature of our financial history is identified that a pessimistic session in our market will be followed by a bear market or gloomy condition. However, the phenomenon that occurred during 2000 makes it unique. After experiencing a downward trend in the course of 6 weeks, the market rallied upward which resulted in a 7.78% increase. Unfortunately, the gain is only temporary which is then followed by chains of losses.
The Dead Cat Bounce is the price pattern that is utilized by the analysts. Some experts are considering this as a continuation pattern wherein the first bounce may appear like a reversal of the previous trend; however, it will then be followed by a continuing dip in the trend. The ‘reversal’ can only be distinguished as a bounce based on the dead cat bounce definition wherein the price will drop once it reaches its previous low. Some traders especially the short-term investors will try to profit on these small rallies. They may see this situation as an opportunity to execute a short position.
There were many Dead Cat Bounces in the year 2000, especially during the September to October period. One notable dead cat bounce example occurred in March 2000 when Cisco System Inc. experiences a peak price at $82/share which suffers a drop of $15.81 in March 2001. The company experienced a lot of short reversal during those periods. For instance, the company saw a sudden reversal of $20.44 in the month of November of the same year only to continue the downward trend to $10.48 on September of 2002. As of the time of this writing, Cisco is trading at $30.06/share which is still a fraction of their peak price.
Identifying dead cat bounce before it has even happened will be a challenging task even for the seasoned and skilled traders. A lot of expert investors have tried to predict the trend only to fail in the end.