Understanding Dead Cat Bounce: Why Traders Keep Getting Trapped

When an asset plummets dramatically, a brief upward movement often follows—but this recovery is deceptively dangerous. In trading terminology, this temporary bounce during a sustained downtrend is called a dead cat bounce, a phrase with roots deeper than most traders realize.

The Origin and Core Concept

The expression dates back to early December 1985, when Financial Times journalists Horace Brag and Wong Sulong documented the term being used by brokers discussing Singapore and Malaysia’s financial markets. Both economies had experienced severe declines, and when prices rebounded slightly, market observers called it a dead cat bounce—referencing the darkly humorous notion that even a deceased feline would bounce if dropped from sufficient height.

The parallel is apt: just as the bounce means nothing for the cat, a price recovery in a downtrend often signals nothing about a genuine market reversal. Singapore and Malaysia’s economies subsequently continued their descent before eventual recovery years later, perfectly illustrating this principle.

Recognizing the Pattern in Cryptocurrency Markets

For cryptocurrency traders and technical analysts, understanding dead cat bounce patterns is crucial. The pattern falls within continuation patterns—chart formations that suggest the previous downtrend will resume rather than reverse.

The danger lies in mistaking this bounce for a trend reversal. In its early stages, the recovery looks promising, attracting optimistic investors. However, the price plateau quickly, then breaks below previous support levels, establishing new lows. This breakdown confirms the pattern’s true nature.

The Bull Trap Risk

Dead cat bounces frequently create what traders call bull traps. These occur when investors, believing recovery is underway, open long positions betting on upward momentum. When the downtrend inevitably resumes and breaks support levels, these positions turn profitable into losses. Technical analysis frameworks help identify these false recoveries, but the pattern remains one of cryptocurrency markets’ most reliable traders’ snares—a lesson that sometimes, a bounce is just a bounce.