What is a Dead Cat Bounce?
Investopedia defines a dead cat bounce as “A dead cat bounce is a temporary recovery from a prolonged decline or a bear market that is followed by the continuation of the downtrend. The name “dead cat bounce” is based on the notion that even a dead cat will bounce if it falls far enough and fast enough.”
When you take a look at the chart below, you can see our entry and exit dates. When trading any good reversal strategy, we are always going to be waiting for the first new candle to make a high on the daily chart. That is our entry spot. This case was no different. We got a nice high relative volume move higher, and then on subsequent days, saw a continuation of the sell off. We took this trade off the watch list because it had a nice setup, low implied volatioity, and made it suitable for an options spread (bull call vertical). We got +15-20% intraday, but missed our 30% ROI target.
Watch list analysis:
“January 4th Watch List
DLTR – A sweet reversal setup here as this doji at the bottom foreshadows a possible move back up. Looking at the low IV opportunity here. Will use a bull call spread Feb17 77.5/80 for a debit of 1.30 or better, ONLY AFTER the stock breaches 78.01. Long entry for stock traders will be over 78.01, stop 77.00. Target here is back toward 80.”
In the end, we did leave some money on the table with this trade and could have exited sooner, but we didn’t know it was going to be a dead cat bounce. It is super important when trading reversals to get out quickly, because selling pressure can escalate quickly if the shorts out there think that a dead cat bounce is imminent. That was the case with $DLTR today after we exited. Adios, $DLTR.
$DLTR Dead Cat Bounce Video Recap