Dead cat bounce refers to when the price appears to be recovering from a prolonged downwards trend, but in reality, it is just a brief retracement before continuing its previous bearish trajectory.
A lot of traders will mistake a dead cat bounce for an actual market reversal, where they will buy into the pattern only to get beaten up by the bears.
This pattern can occur in any market and here we spotted a few dead cat bounces from some of the major Forex pairs this past week as markets are filled with uncertainties from record inflation data and China’s covid cases to the ongoing war between Ukraine and Russia.
EURUSD Daily Chart
Two dead cat bounce formations are evident in the chart above. In the first instance, there was a 350 pips up move within a short span of time (6 trading days) following a downward trend that lasted for 7 months. In the second instance, a 370 pips up move built up over time. Traders would have thought that the market was preparing to reverse and start a new bullish move and was busy placing long positions. Not long after, all the bids were gobbled up by the market and the pair proceeded to trade lower.
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GBPUSD Daily Chart
GBPUSD has been trading in a bearish channel since July last year. The pair kept making lower highs and lower lows as it trades lower. On March 15, it began to reverse and rallied nearly 300 pips in six trading days. That was pretty significant as the retracement was about 40% of its most recent bearish impulsive move. Traders would have been thinking that it was a market reversal and bought into the short-lived rally, only for the price to go back to its swing low 2 weeks later.
Have you guys ever fell for this trap?
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BreadMaker
Trader, Technical Analyst
