|
Written by and copyright © 2005-2009 by Thomas N. Bulkowski. All rights reserved.
For more information on this pattern, read
Encyclopedia of Chart Patterns, Second Edition  ,
pictured on the right, pages 829 to 843. That chapter gives a complete review of the chart pattern, compared to what is described below.
The dead-cat bounce
is the name of this event pattern. Price makes a dramatic drop, averaging 30%, before
bouncing only to resume the decline at a more leisurely rate.
Which industries are more
likely to have stocks that dead-cat bounce? For the answer, click
here.
Identification Guidelines
Reference the above figure in the following table.
| Characteristic | Discussion |
| Price gap | Price usually gaps downward, closing 15% to 70% lower than the prior day. The average event decline from prior close to trend low is 31%. |
| Trend low | Forty-six percent make a lower low the next day, 17% continue lower the next day, then 9%, and then 3%, respectively. From the event day to the trend low averages 7 days. |
| Bounce | After the event day decline, price bounces. Twenty-two percent will close the gap during the bounce phase, 38%
will close it in 3 months, and 58% will close the gap in 6 months. The average bounce height from event low to bounce high is 28% and takes 23 days. |
| Post bounce decline | Once the bounce completes, price resumes declining, averaging 30% from the bounce high to post bounce low in 49 days. This places price an average of
18% below the event low 67% of the time. |
| Second dead-cat bounce | Twenty-six percent will have a second dead-cat bounce measuring at least 15% within 3 months, and 38% will dead-cat bounce within 6 months. |
Trading Tips
I released a trading setup based on new research using a dead-cat bounce that may interest you.
| Trading Tactic | Explanation |
| Bounce | The larger the event day decline, the larger the bounce and the longer it takes for price to reach the bounce high. |
| Sell | If you own the stock, wait for the bounce to peak and then sell. |
| Swingers | Swing traders can buy near the event trend low and ride price upward until it peaks in the bounce phase. Only try this if the event day decline is a large one,
say over 30%. Event losses (from the close the day before the event to the trend low) above the median 28% decline had bounces averaging 35% in 25 days. Those below the median bounced
22% and took 20 days. |
| Short | For experienced traders, short the stock at the top of the bounce and ride price lower. Expect price to drop to at least the event trend low. |
Example
The above figure shows an example of a dead-cat bounce.
On July 5, 2001, a broker issued a report that said
Amazon.com would beat the consensus estimate for earnings. It didn’t. When Amazon.com announced earnings results
on July 23, they were below expectations. Price gapped open and closed 25% lower. The next day, price made a lower low and then started a recovery. It bounced upward for about a week and
then turned down. When price finally began a recovery, it had bottom 66% below the close the day before the earnings announcement.
Other Examples
-- Thomas Bulkowski
|
. If you buy ANYTHING, they pay for the referral.
on 
