Beware the Dead Cat Bounce !

In this post i will explain about an interesting phenomenon in the financial market… the Death Cath Bounce… and how it is very relevant to today.

The term probably first used in print either in a 1985 Financial Times article by reporter Sherwell in a comment on the sharp decline in the Singapore stock market or by Devoe Jr. research analyst, who advocated using a bumper sticker “Beware the Dead Cat Bounce” in 1986.

The DCB is most profitable and more easily recognized after a large downward breakaway gap or upward breakaway spike. The DCB’s downward breakaway gap characteristics include a short rally of several days up to two weeks after the first bottom from the sharp first news event sell-off. In reverse, the DCB’s upward breakaway spike characteristics include a short down of several days up to two weeks after the first top from the sharp first news event buy-on.

Here a picture of the earlier beginning of DCB – after downward breakaway of GBPCHF (for the Swiss-Franc is upward breakaway) :

DCB downward breakaway gap – normally, the larger the first decline, the higher the bounce. The bounce comes from bargain hunters and bottom fishing traders, who are second-guessing when the actually bottom will take place. It is also gathering momentum from short covering and momentum signals. The buyers are usually wrong !

Now, look what we are seen here – the end of DCB downward breakout :

In over 67% of DCBs (Bulkowski, 2010), the price continues to lower after the DCB, and break the earlier news event low an average of 18% !

But, the Algorithmic-Trading system as Engineering Investments has developed, is only the way to make profits from 99% of DCB events. In addition, the Algorithmic-Trading system is 99% safer due to a direction was not taken.