In crypto and finance, “dead cat bounce” is the phrase used to explain the often counterintuitive “bounce” in value that assets sometimes undergo when they have been very recently in steep decline.
The phrase has its origins in the old saying, “even a dead cat will bounce when it falls from a great height.”
Essentially, this phrase describes how people will mistake the “bounce” for evidence in life.
In crypto or stocks, you’ll often see this phenomenon play out after a massive fall in value, only for the asset to very brief spike in value. This brief spike is often misinterpreted as the price of turning around, but it is only a momentary pause in the process.
The phrase is often used interchangeably with “sucker rally.”
How does it work and what causes it?
In terms of technical analysis, a dead cat bounce is usually a retroactive identification rather than a prediction ahead of time. Often, when price analysis is ongoing, it can be very difficult to assess if the asset is undergoing natural elasticity and is just finding new ceiling and basement price points.
It appears that dead cat bounce is simply a good way to express the illogical herd mentalities that can often overtake a market.
Often, when the price is dropping, people may be unwilling to consider that their anchor point of pricing is overvalued, therefore, as the price plummets, they attempt to “snatch up” the “opportunity.”
With enough people making this mistake, the market will see a very small, short-lived price jump.
Other causes can be market manipulation, media reports, or even technological glitches in exchanges.