A dead cat bounce is traditionally described (for example Investopedia) as “a small, brief recovery in the price of a declining market”. We day traders like to look at it a bit differently – because when we anticipate these bounces, we can take profits smartly and quickly.
For us, a dead cat bounce is the pull back we see after a very strong reaction to a news item, or any quick, strong movement, either up or down. The typical behavior to a significant news announcement is very strong movement, very quickly. But, once that strong movement peters out, sometimes after only a minute or two, we get that bounce, where the market retraces towards it’s price point just before the news came out.
Here are two charts showing the same event: the FOMC announcement on March 19th, 2014. The first chart, as you can see in the upper left corner, is the YM (Dow index futures contract), showing 15 second bars.
The price action you see here is quite typical of FOMC day action. The market sits around, hardly moving, “holding its breath”, so to speak, waiting to see what the fed is going to do. Then, when the announcement comes out, the market reacts with big moves. Continue reading »
