Trading the Dead Cat Bounce Pattern.
The Dead cat bounce is a bearish structure that occurs mainly due to a high impact event, for example, news-related, significative, report or a speech by a central bank official.
The name arose for the first time in an article by Chris Sherwell in The Financial Times, on December 7, 1985. However, the race for the phrase authorship does not end here. Recently in The Financial Times, on a Letter to the Editor in, July 8, 2017, Jude Kinne wrote:
“I was the ‘trader in Singapore’ to whom the Financial Times’ Chris Sherwell attributed the ‘dead cat bounce’ quote”.
Aside from the origin of the pattern’s name, what matters is recognising its structure, which shows the following characteristics:
– The main component is that the movement begins with a more than 10% slump, breaking down the previous low. Ideally, leaving a price gap.
– When the panic shows at the news, “recovery,” begins. Prices start recovering and moving upward.
– After this bounce ends, another downward movement begins. This drop could be between 5% to 25% deep.
– Once that we have detected a “Dead Cat Bounce” candidate pattern, the recovery could reach the 50% to 61.8% of Fibonacci retracement.
The Setup.
– Entry: Enter a short position when the price reaches the 50% to 61.8% Fibonacci retracement level of the first slide.
– Stop Loss: The stop could be placed above the 76.4% Fibonacci retracement level of the first fall.
– Take Profit: The target could be placed above the 76.4% with extension in 100% of the Fibonacci projection.
Potential Dead-Cat Bounce in Dow Jones Transportation.
The example corresponds to the Dow Jones Transportation Average daily chart, which has already made a first bearish move. The recovery approached the zone between 50% and 61.8% Fib retracement, from where the price started to go down again. The example is a potential dead-cat bounce pattern which still is in process. The potential bearish target of this scenario is between 9,306 and 8,869 (76.4% and 100% Fib projection.) The invalidation level is above 11,174 (76.4% Fib retracement.)
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