And this video dead cat bounce.
Trading strategies so the phrase dead cat bounce.
Comes from the idea that even a dead cat will bounce if the market falls quick enough.
And this is simply because we can't go down forever.
But you need a massive sell off.
To have this phenomenon happen typically you'll get a bit of a bounce and then perhaps some continuation
if you lose say 15 percent in one day it's it's impossible to keep going down like that.
Eventually there will be short sellers taking profits.
There'll be people jumping in trying to pick up the stock on the cheap kind of thing.
But if the negative momentum continues you can get continuation at the very least you can get a retest
of the lows in front of you I have a chart that shows two of my favorite strategies for dealing with
dead cat bounces when it comes to day trading.
Now I'll bring your attention to the gap lower the kick off the day here on the 25th.
As you can see on the chart we just fell apart so there's a couple of things that you need to pay attention
to.
First thing you have to ask yourself is have we passed any major previous resistance.
And we did in the form of this gap.
So obviously this gap should translate into resistance again.
Now that we've broken through it it should have been support.
But you can see that did not happen.
So a couple days later in that same area you can see that we rolled over.
And at this point you have to ask yourself OK so what was the clue.
Well the clue was this area and this massive scandal here it isn't quite an engulfing scandal but it
most certainly shows an extremely long red candle and bearishness and in fact we went right back down
to the lows a few cents or so.
So that's the first way you could have played this you could have just noticed.
Where do we blow through.
Because it's difficult to jump into this market here Frank.
You can almost always count on losing money but you recognize this gap and you recognize that it could
give you an opportunity and you got it there.
And in fact you could have even entered from this candlestick if you gave it enough of a stop loss perhaps
above the top of the gap.
So either one really would have worked but once we rallied and tried to take this out and then failed
again that was a sign that you're going to get lower.
So you're short on that candlestick and for the rest of the day the market does nothing but fall.
That's one way you can play these another way of course is using a Fibonacci retracement tool and you
can see that the same reversal with candlestick here and this gap lined up quite nicely with the 50
percent Fibonacci retracement.
The main takeaway from this should be be very patient look for an area that makes a lot of sense to
cause problems for the bounce.
And this typically means at least in day trading that it's it's actually a trade.
You take several days later.
That's that's very common.
Because it's it's really rare that you're going to fall like that and then turn around and bounce right
back up there on the same day.
If you do then you have an extraordinarily volatile market that you should probably stay away from but
a bounce like this is very sustainable.
It's very reliable in the sense that eventually it will roll back over and once it does it should at
the very least try to test this bottom trading dead cat bounces is a bit difficult on the short term
chart.
And that's another reason why you need to be so patient you could even make an argument for a downtrend
line there that we had tested and failed at because there were three heads.
It's a little bit of a stretch but if you can find one that's a good way to look at this as well.