How to Spot a Dead Cat Bounce

Find out what to look for if you want to trade this bearish pattern

   

You’ve likely heard of the technical pattern called a “dead cat bounce,” which tends to be very predictive for bearish traders in a down or flat market. If you plan to trade this signal, know that it is a fairly aggressive trade. Also, being bearish means you are either shorting the stock or potentially using options to profit from a decline, so make sure you have the ability to do that in your brokerage account before attempting to trade this pattern.

The somewhat disturbing name describes a pattern that emerges in a downtrend. First the stock breaks away into a gap to the downside (the dead cat), and then it rallies back toward the top or bottom of that gap (bounce), and finally, treating that gap as resistance, the stock moves back down again. Traders use bearish trading strategies to profit from that final decline.

What to Look For

1. We recommend first looking for a stock that has been in a downtrend for at least a quarter.

2. Include criteria that would find a stock that has moved up over the last week (the bounce).

3. Filter for stocks that are both shortable and optionable. This will help you avoid some junk, and it will make sure you could actually execute a bearish strategy on the stock.

4. Finally, we would suggest including some optional criteria like a high beta-score or very poor fundamental characteristics. You should experiment with the search yourself to find something that accommodates your own trading style.

Learn more about a dead cat bounce by watching the video here.   

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Article printed from InvestorPlace Media, http://investorplace.com/2010/08/how-to-identify-a-dead-cat-bounce/.

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