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Whale Trading

Dead Cat Bounce: False Rebounds After Sharp Selloffs

In this chapter we focus on the dead cat bounce pattern.

In one sentence, it is:

A short, sharp rebound after a heavy selloff
that fails and leads to fresh lows.

  • It looks like a bottom at first glance,
  • encourages dip buying,
  • and often ends as a trap for late long entries.

The diagram below shows a simplified dead cat bounce structure:

  • ① Prior trend breaks and price drops hard
  • ② An oversold, fast rebound develops
  • ③ The bounce stalls below key resistance / the breakdown area
  • ④ Price rolls over and makes new lows

1. What Is a Dead Cat Bounce Pattern?

A dead cat bounce typically unfolds like this:

  1. Sharp decline or crash
    • Triggered by news, liquidations, forced selling, or panic.
  2. Short and steep rebound
    • Perceived as “oversold and cheap,”
      combined with short covering,
      producing a fast bounce.
  3. Failure below key resistance
    • Bounce stalls near
      chart-basics/s-r style levels:
      a broken support that has turned into resistance,
      or the origin of the prior breakdown.
  4. Renewed selloff to new lows
    • Dip buyers in the bounce phase are forced to exit,
      adding fuel to a trend continuation lower.

In short:

“A market that already took a big hit
looks like it’s recovering,
but ends up getting hit again.”

2. Dead Cat Bounce vs Real Bottom Formation

Crucially, not every post-crash bounce is a dead cat bounce.
In real markets we must separate it from a genuine bottoming process.

The diagram below compares:

  • Left: a dead cat bounce followed by new lows,
  • Right: a real bottom with double bottom / inverse H&S style structure.

2-1. What They Have in Common

  • Both start with a sharp selloff.
  • Both feature a fast, impressive bounce.
  • Both may be triggered or amplified by news events.

So the first rebound alone is often not enough to tell the difference.

2-2. Key Differences (Price Structure)

Dead cat bounce (trend continuation)

  • The second leg down clearly breaks the prior low.
  • Even at the new low, there may be little sign of strong defense
    (few long lower wicks, weak volume support).

Real bottom (reversal)

  • Lows are retested and defended multiple times.
  • Structures like double bottoms or inverse head and shoulders emerge:
    see double-top-bottom
    and head-and-shoulders.
  • We see repeated “downside attempts failing, upside attempts improving”.

2-3. Key Differences (Location and Context)

  • Dead cat bounces often occur in the middle of a larger downtrend.
  • Real bottoms more often appear when:
    • The market has already endured a long decline.
    • Price is near strong higher-timeframe support
      from s-r.
    • The selloff looks late-stage and exhausted in
      swing-vs-correction terms.

3. Volume and Timeframe in Dead Cat Bounces

3-1. Volume Behaviour

As discussed in volume,
volume can help distinguish dead cat bounces from real bottoms.

A typical dead cat bounce may show:

  • Capitulation-like volume on the initial crash,
  • A rebound with moderate to decent volume,
    but not as strong as during prior upswings,
  • A second selloff where volume picks up again
    as bounce buyers exit and shorts re-enter.

In contrast, real bottoms often show:

  • High volume on the panic selloff,
  • Persistent buy-side volume during subsequent rebounds,
  • Pullbacks that hold the lows with lighter, quieter volume.

(These are tendencies, not hard rules.)

3-2. Timeframe Considerations

From timeframes:

  • A dead cat bounce on a 5-minute chart
    can be just a wick on the daily.
  • A daily dead cat bounce may break down into
    several smaller patterns on 1h/4h.

In practice, many traders:

  1. Use daily/4h to understand the scale of the decline, then
  2. Zoom into 1h and below to structure entries and exits
    around dead cat bounce scenarios.

4. When Dead Cat Bounces Fail (Short Traps)

Dead cat bounces can fail as patterns too.

The expectation:

  • Selloff → bounce → rollover → new low

But in reality:

  • The rollover stalls near the prior low,
  • Price shows strong defense (long lower wicks + volume spike),
  • Structure morphs into a double bottom or inverse H&S.

In that case:

  • Traders who sold into the bounce,
    expecting a dead cat continuation,
    can end up caught in a short trap.
  • If the market then reclaims the bounce high
    with strong volume,
    the pattern is effectively promoted to a real bottom candidate.

These “dead-cat-that-turned-into-a-bottom” cases, and the
short squeezes they can produce, are covered further in
failure.

5. Practical Checklist and Risk Management

Whenever you think you see a dead cat bounce, run through:

  1. How big was the prior decline?

    • A minor pullback,
      or part of a multi-month downtrend?
    • Check higher timeframes using
      timeframes.

  2. How far does the bounce reach?

    • Does it stall near a broken support turned resistance
      from s-r?
    • Does it fade near the origin of the breakdown?

  3. What does volume look like on the bounce?

    • Clearly weaker, similar, or stronger than on the selloff?
    • Do you see a surge in selling volume at the end of the bounce?

  4. How does the next leg down behave?

    • Does price cleanly break the prior low?
    • Or do you see defense near the low
      (strong wicks + volume) that hints at bottoming?

  5. Is your risk plan explicit?

    • If you trade short on a dead cat thesis:
      • At what price is the idea clearly wrong?
      • Can you accept that stop as part of
        risk-management?
    • Is your position size aligned with account-level risk?

6. Where to Go Next

Dead cat bounces are all about deciding whether a post-crash bounce
is fake continuation or the start of a real bottom.

Good companion chapters:

Rather than treating “dead cat bounce” as a magic label,
focus on:

Who is getting trapped around the bounce,
and where does real commitment show up in volume and structure?