Dead Cat Bounce
A dead cat bounce is a brief recovery in a steep fall, after which the decline carries on. Why it is bearish, where the name comes from, and an example.
A dead cat bounce is a short-lived price recovery during a steep fall, after which the decline carries on.
Explained simply
The grim name makes the point: even a dead cat bounces if it falls from high enough, but the bounce does not mean it is alive. The phrase is usually traced to a broker quoted in the Financial Times on 7 December 1985.
Key takeaways
- It is bearish: the bounce stalls below the previous high and the price goes on to a new low. Example (illustrative): a share falls from 100 to 60, recovers to 72, then drops to 55.
- Named only afterwards: a dead cat bounce can only be identified with certainty in hindsight. Until the new low comes, it looks like the start of a recovery, which is why buyers get caught.
- What comes before it: bounces like this often follow capitulation, when selling exhausts itself for a while before the fall resumes.
- The opposite: a brief drop inside a rise is sometimes called an inverted dead cat bounce. When sellers pile into that drop, it works as a bear trap.
The lower-high test, step by step
The prices below are illustrative. They show the test that turns a bounce into a dead cat bounce.
Point | Price | Reading |
|---|---|---|
Peak | 100 | The fall starts. |
First low | 60 | Down 40% from the peak. |
Bounce high | 72 | Up 20% from the low, but still 28% below the peak: a lower high. |
New low | 55 | Below the first low of 60. Only now is the bounce confirmed as a dead cat bounce. |
Two things in the table matter. First, the bounce looks large on its own: 12 points is a 20% gain from 60. Measured against the fall, it won back 12 of the 40 points lost, less than a third. Second, the label arrives only at 55, when the price breaks the first low. Had the share gone on from 72 to a high above 100, the same bounce would have been the start of a recovery, and nobody would call it a dead cat bounce.
Why it catches buyers: after a steep fall, a 20% rise looks like a turn. Short sellers closing their positions can add to the bounce, and buyers who think the low is in join them. When that buying runs out below the old high, the sellers return and the fall resumes.
That is the honest limit of the term. It describes a pattern once it is complete. In real time, a bounce that stalls below the previous high is a warning sign some traders watch, not proof of what comes next. The inverted case works the same way the other way up: a sharp drop inside a rise that is quickly recovered.
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