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Dead Cat Bounce

06/27/00 10:30:00 AM
by Jayanthi Gopalakrishnan

Ever experienced a sharp decline in prices? Given the volatility of the markets, it is not unusual for this to happen.

Security:   MSTR
Position:   N/A

When the price of a security declines sharply look for the formation of a dead cat bounce. Usually such declines are followed by a short-lived recovery period. Prices bounce up, reach a recovery high, and continue sliding down even further.

An example can be seen in the chart of Microstrategy, Inc. (MSTR). The strong decline on 3/20/00 from 226.75 to 86.75 was followed by a recovery with prices going as high as 142 on 3/27/00. This recovery took place within three days after which prices continued dropping even further.

Here you see the formation of a dead cat bounce after a sharp decline in prices.
Graphic provided by: CyBerCorp, Inc..
 
If you had an open position in MSTR when it declined on 3/20/00, you obviously would have lost a substantial portion of your investment. These sharp declines can take you by surprise and unless you suspected this type of action, there isn't much you can do. If you have an open position in a stock that declines sharply consider it a sign to exit the position.

You can use dead cat bounces to identify shorting opportunities. After their occurence you can enter a short position at the high of the bounce and profit from this position by exiting your position at the low of the decline that is expected to follow.



Jayanthi Gopalakrishnan


Title: Editor
Company: Technical Analysis of Stocks & Commodities
Address: 4757 California Ave SW
Seattle, WA 98116
Website: Traders.com
E-mail address: Jayanthi@traders.com

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Date: / /Rank: 1Comment: why did i never think of selling at the high of a bounce and buying at the low of the following decline?
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