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Bulkowski's Inverted Dead-Cat Bounce

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As of 02/20/2019
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Written by and copyright © 2005-2019 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners.

For more information on this pattern, read Encyclopedia of Chart Patterns Second EditionEncyclopedia of Chart Patterns 2nd Edition book., pictured on the right, pages 844 to 854. That chapter gives a complete review of the chart pattern, including tour, identification guidelines, focus on failures, performance statistics, trading tactics, and sample trade. Below is just a sliver of the information contained in the book.

The inverted dead-cat bounce is the name for this event pattern. Price makes a dramatic rise, from 5% to 20% or more, before declining at a more leisurely rate.

 

 

Inverted dead cat bounce event pattern

Inverted Dead-Cat Bounce

Inverted Dead-Cat Bounce Identification Guidelines

CharacteristicDiscussion
Price riseLook for an event that causes price to jump at least 5% but it can be 20%, 50%, or even higher. Avoid those stocks with takeover rumors as they tend to stay high or move even higher.
Higher highPrice typically moves higher the day following the event.
DeclineAfter that, price tends to decline.
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Inverted Dead-Cat Bounce Trading Tips

The following is based on tens of thousands of samples covering both a bull and bear market. Since it uses averages, your results will vary. Trade it appropriately for the situation. I have seen a number of cases in which price continues to climb after an event. Thus, a sale after the initial price rise might cause you to miss a substantial upward move. Trade this one carefully.

Trading TacticExplanation
MeasureMeasure the close-to-close price difference from the day before the event to the event day (the day price shoots upward). Then match the percentage rise with the one in the left column below.
5% riseSell the day after the initial rise. Buy back in during week 2 for a rise that lasts through week 4.
10% riseSell the day after the initial rise. Price trends lower thereafter.
15% riseSell the day after the initial rise. Price may bottom on day 3. Buy back in and hold until week 4 when price peaks.
20% riseSell the day after the initial rise. Buy back on days 3 or 11 and sell early in week 2 or week 4. Price trends downward at the end of week 4.
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Inverted Dead-Cat Bounce Example

Inverted dead-cat bounce event pattern example

The above figure shows an example of an inverted dead-cat bounce event pattern. Price soars by 28%, measured close to close. The company reaffirmed earnings projections for the year and said earnings would be at the high end of the range. A broker downgraded the stock but that did not prevent price from jumping up. Price made a new high a day later and then started a slide back down. Price reached a high of 15 before dropping to a low of 9.95, a decline of over 33%.

-- Thomas Bulkowski

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Other Inverted Dead-Cat Bounce Examples

See Also

Written by and copyright © 2005-2019 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners. Disinformation is not as good as datinformation.