Introduction
Millions of traders enter the crypto market even though it is highly volatile. To maintain a strong portfolio, seasoned traders analyze market movement and identify chart patterns.
The market moves and chart patterns inform them about price fluctuations, and they decide whether it is a season to buy or the time to sell. Technical analysis also plays a vital role for short-term investors.
One of the most commonly observed technical phenomena is ‘dead cat bounce,’ which, despite its straightforward explanation, is challenging to identify in a real-world scenario.
What is ‘Dead Cat Bounce’?
A technical analysis pattern occurs when there is a long-term downtrend. It denotes a sudden upward momentum followed by a drop to the previous low and further decline. It indicates a short-term recovery of assets from a downtrend.
Where did the pattern dead cat bounce come from?
Dead Cat Bounce is a technical pattern derived from the saying, “Even a dead cat will bounce if dropped from a great height.”
It was taken as a price reversal in previous marketing history, but the downward trend continued, setting new lows by breaking previous support levels. This pattern can also lead to a bull trap, where investors take long positions anticipating a trend reversal that never occurs.
What is the purpose of ‘Dead Cat Bounce’?
The purpose of spotting a dead cat bounce is to determine whether a stock or other asset that has appreciated after a prolonged downturn will continue to increase in value.
For example, a trader who has shorted a particular stock and believes the price increase is a dead cat bounce might decide to maintain their short position. Conversely, if a trader thinks the price movement indicates a long-term rally, they should cut their losses and close the short position.
How to identify the Dead Cat Bounce?
Predicting whether a rebound is short-term or sustainable is a complex process with unreliable results despite using various technical and fundamental analysis techniques. The certainty of a rebound’s nature can only be confirmed after the period has passed.
A dead cat bounce can occur due to several factors, such as bears closing short positions or bulls establishing new long positions, believing an asset has bottomed out. Additionally, momentum traders may build positions when an asset’s Relative Strength Index (RSI) is oversold.
As mentioned earlier, a dead cat bounce is typically recognized only after it has occurred. Consequently, traders may mistake a rebound following a sharp decline for a trend reversal, signaling a long upswing.
Distinguishing between a dead cat bounce and a market reversal is challenging. Identifying a market bottom is notoriously difficult, and recent upward trends can easily be misinterpreted.
Is Bitcoin Faces Dead Rat Bounce?
Bitcoin (BTC-USD) ended last week at its lowest point in four months, sparking concerns among traders about potential further declines. The term “dead cat bounce” describes a temporary recovery in the price of an asset after a sharp decline, only to resume its downward trajectory. Market sentiment has dramatically shifted towards fear, with the Crypto Fear and Greed Index plunging by 60% over the past month, indicating “extreme fear” among investors.
This shift coincides with Bitcoin’s recent -2.3% dip over 24 hours and a significant -18.4% decline over the past month. Experts highlight Bitcoin’s confirmed breakdown from its multi-month consolidation range, which could lead to even lower price targets.
Conclusion
Although the market indicators decide the price fluctuations of the market, based on fundamental analysis and market sentiments, the dead cat bounce prediction may also change. Select your strategy and research to trade in unstable market conditions.
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