Wealthy Living

Dead Cat Bounce: A Complete Guide

They say that what comes up must go down, but an equally true and less discussed phenomenon is that what goes down must come up. At least, sometimes.

The idea of a “dead cat bounce” might sound somewhat alarming, but as long as you hear it mentioned within the context of trading, it refers to a particular phenomenon in the stock market.

The phrase comes from the idea that even dead cats will bounce if they fall from a high enough point.

What are the Causes?

A bounce happens when pessimism begins to set into a bear market.

If the market continuously displays a downward trend for weeks on end, the conditions for a bounce begin to foster — and it’s made possible by the way different types of traders act.

The bears will engage in short selling, hoping that they can profit as the price continues to fall.

The Economics at Play

As you’re probably well aware, the two main forces at play in economics are supply and demand.

In the case of a dead cat bounce, the supply force is made up of the investors who are shorting, while demand is fuelled by investors who believe the stock price is about to increase.

The Market Psychology

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