When a Dead Cat Bounce Tricks Your Trading Game

You ever watch a crypto price chart and see it bounce back hard after a brutal dump, thinking the worst is over? That’s probably a dead cat bounce—and it’s one of the sneakiest traps in trading.

What’s a Dead Cat Bounce?

The term comes straight from Wall Street: “Even a dead cat will bounce if you drop it from high enough.” It’s a crude comparison, but it perfectly describes what happens when an asset briefly recovers during a major downtrend, only to crash again shortly after. Unlike a real trend reversal, this bounce is just a temporary exhale before the selling pressure returns.

For cryptocurrency traders and technical analysts, this pattern falls into the “continuation pattern” category—meaning the overall downtrend is likely to resume once the bounce fizzles out.

Why It’s So Dangerous for Traders

Here’s where most people get trapped: A dead cat bounce looks almost identical to the early stages of a trend reversal at first glance. The price recovers, volume might pick up, and suddenly traders think the bear market is ending. So they open long positions, hoping the trend is finally turning around.

Then reality hits. The price hits resistance again, refuses to break higher, and before you know it, the downward pressure resumes with even more force. Previous support levels get obliterated, new lows get established, and those long positions? They’re now a classic bull trap—a cruel reminder that not every bounce means salvation.

The Pattern in Action: A Historical Example

The term itself first appeared in mainstream financial media in early December 1985, when Financial Times journalists quoted a broker analyzing the markets of Singapore and Malaysia. Both had shown sharp recovery attempts after significant declines. The quote: “This is what we call a dead cat bounce.”

The prediction proved accurate. Despite those brief recoveries, both economies’ markets continued their downward spiral for several more years before stabilizing.

How to Spot It and Stay Safe

The key difference between a real reversal and a dead cat bounce is what happens at resistance. In a genuine reversal, the asset breaks through previous resistance levels and establishes higher lows. In a dead cat bounce, it hits that resistance again and retreats—often breaking through previous support levels in the process.

For traders, this means confirming the bounce hasn’t broken major resistance before entering any long positions. Volume analysis, momentum indicators, and support/resistance levels are your friends here. Don’t chase the bounce—wait for confirmation that the trend has actually reversed.

The dead cat bounce is a harsh lesson in patience. One of Wall Street’s oldest cautionary tales, it remains as relevant in crypto markets today as it was in 1985.