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The Dead-Cat Bounce is a bearish continuation pattern where a sharp decline is followed by a brief, unconvincing recovery before the downtrend resumes. The name comes from the morbid Wall Street saying: "even a dead cat will bounce if it falls from a great height."
This pattern is critical for crypto traders to understand because it traps dip-buyers repeatedly during bear markets. The bounce looks like a reversal but is actually just a pause in the selling.
Dead-cat bounces typically retrace 20–50% of the initial decline before failing, and the subsequent drop often exceeds the first leg.
The initial drop creates panic. Sharp, high-volume selling triggers fear. Holders who should have sold earlier dump positions at any price.
The bounce triggers hope. "It's recovering!" "This was oversold!" Bargain hunters and short-covering create a temporary rally. Social media fills with bottom calls.
The bounce fails because the fundamental selling pressure hasn't resolved. The rally runs out of buyers, price rolls over, and now there are even MORE trapped longs from the bounce. Their forced liquidation drives the second leg lower.
Short when the bounce stalls at resistance (prior support, moving average, Fibonacci level) and reversal candles appear.
Above the bounce high. If the bounce exceeds the prior swing, it's not a dead cat — it's a reversal.
At minimum, a retest of the initial low. Extended target is a measured move below that low.
Typically 1:2 or better since the bounce provides a tight stop and the decline has further to go.
Dead-cat bounces are most common in crypto bear markets and after major negative catalysts. Learning to identify them prevents the most expensive mistake in trading: buying too early in a downtrend.
In crypto, the second and third dead-cat bounces are where most retail money gets destroyed. Count the bounces — don't buy the first one.
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