What Is a Dead Cat Bounce? How To Spot and Trade It in Stocks and Options
Markets don’t move in straight lines — and just because a stock starts bouncing doesn’t mean it’s heading for a true recovery. One of the most deceptive patterns in technical analysis is the Dead Cat Bounce — a sharp but temporary rebound in a falling stock.
If you’ve ever gone long on a stock only to see it continue plummeting after a bounce… you might’ve just met the cat.
In this post, we’ll break down what it is, how to identify it, and how to capitalize on it with both stocks and options.
What Is a Dead Cat Bounce?
A Dead Cat Bounce is a short-term recovery in a stock (or index) that’s been in a downtrend, followed by a continuation of the decline.
The name comes from the idea that “even a dead cat will bounce if it falls far enough.” In trading terms, it’s a false rally that traps optimistic buyers before the downtrend resumes.
Key Characteristics of a Dead Cat Bounce
Follows a sharp price drop
Triggers a quick bounce (1–3 days or 1–2 candles on longer timeframes)
Volume may spike temporarily
Bounce fails to reclaim key resistance (e.g., moving averages or trendlines)
Price resumes the downtrend shortly after
It often occurs during bear markets, earnings misses, or after bad news has been priced in — but not absorbed.
Dead Cat Bounce vs. Real Reversal
| Dead Cat | True Reversal |
|---|---|
| Short-lived bounce | Sustained higher lows and volume |
| Fails at resistance | Breaks through and holds resistance |
| Occurs during strong downtrend | Signals trend exhaustion |
| Weak volume follow-through | Bullish confirmation volume |
💡 Pro tip: Watch how price reacts to the 20-day or 50-day moving average — many dead cats get swatted there.
How To Spot a Dead Cat Bounce on a Chart
Look for a sharp decline
Watch for a bounce that retraces 10–50% of the move
Check for overhead resistance (e.g., broken support, MAs)
If price fails to break out and stalls, prepare for a re-entry short
Bonus: Use Fibonacci retracement levels to gauge where the bounce might fizzle (38.2% and 50% are common rejection zones).
How To Trade a Dead Cat Bounce – Stocks
đź”» 1. Short Into Resistance
Wait for the bounce to top out at a key resistance level, then short when price starts to stall or reverse.
Entry: Bearish engulfing candle or rejection at resistance
Stop-loss: Just above the bounce high
Target: Retest of recent lows or continuation to new lows
🧠2. Use Trendlines & MAs
If the stock fails to reclaim the 20 or 50-day MA on the bounce, that’s usually a strong short signal.
How To Trade a Dead Cat Bounce – Options
📉 A. Buy Puts (After Confirmation)
Wait for the bounce to stall
Enter slightly in-the-money puts
Short-dated options work best for aggressive setups
📉 B. Bear Put Spreads
If Implied Volatility (IV) is high, reduce cost by buying a put and selling one further OTM. Lower risk, capped reward.
🛡️ C. Sell Call Credit Spreads
If you’re confident the bounce will fail below a resistance level, sell call spreads just above that zone.
Real-Life Example: $ARKK (2022)
Dead Cat Bounce Trading Tips
âś… Use volume and price action to confirm weakness
âś… Wait for rejection before entering bearish trades
✅ Set tight stops — dead cats can claw back unexpectedly
âś… Use Implied Volatility (IV) and Open Interest (OI) when structuring options trades
✅ Don’t chase the initial drop — wait for the bounce
Common Mistakes To Avoid
Going long too early: That bounce may be a trap
Assuming every bounce is a dead cat: Wait for rejection — don’t force it
Ignoring broader trend: Context matters. A bounce during an uptrend isn’t a dead cat.
Frequently Asked Questions (FAQ)
How long does a dead cat bounce last?
Usually 1–5 trading sessions, though it can last longer on slower-moving charts or weekly timeframes.
Is a dead cat bounce a short-selling opportunity?
Yes — when confirmed, it can offer high-probability short setups, especially when paired with technical resistance levels.
Can you use options to trade a dead cat bounce?
Absolutely. Buying puts or using bearish spreads can give you defined-risk ways to profit from failed bounces.
Final Thoughts
The Dead Cat Bounce is a powerful chart pattern that catches many traders off guard. But when you learn to spot it early — and structure your trades accordingly — it can become one of the cleanest setups in bearish environments.
Pair it with:
Moving averages
Resistance zones
Options strategies with defined risk
…and you’ll be set up to profit without falling for the trap.
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