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With the turmoil that hit most markets in the last two weeks followed by a small recovery late last week, are we seeing a classical Dead Cat Bounce appear infront of our eyes?

Looking at the charts of the S&P500 in the USA and the S&P ASX200 in Australia (to give 2 examples), it looks like the start of another sell off and more turmoil.

Is it not possible that this will develop into the Dead Cat Bounce pattern, meaning that the markets are in for more movement to the downside? If so how can this pattern be traded if it eventuates, and what is the psychology behind the Dead Cat Bounce Pattern?

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    You have two questions here. I think the one in the title is potentially legitimate. But your other question of "is this a dead cat bounce right now/will the market go down again" is just asking for speculation. – BrenBarn Sep 1 '15 at 17:50
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    @BrenBarn, I am asking if a technical pattern is about to form and what the possible implications of that are. Going by the almost 3% falls in Europe and the USA today, it seems like my observation is becoming fact. You may not like it but it is what is happening in the markets and it is not speculation or opinion. – user9822 Sep 1 '15 at 21:24
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    A couple of days of volatility does not a pattern make. – Nathan L Sep 1 '15 at 22:57
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    And a pattern that can easily occur in a random walk -- as this one can -- does not necessarily have any actual cause or psychology behind it; the analysis may say more about the explainer than the explained. "Sometimes a cigar is just a cigar." – keshlam Sep 2 '15 at 1:44
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    @keshlam - just because you have not studied technical analysis and are unaware of the psychology behind market movements in the short term, does not mean they do not exist! – Victor Sep 2 '15 at 2:33
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You are correct, a possible Dead Cat Bounce is forming on the stock markets. If it does form it will mean that prices have not reached their bottom, as this pattern is a bearish continuation pattern.

For a Dead Cat Bounce to form prices will need to break through support formed by the lows last week. If prices bounce off the support and go back up it could become a double bottom pattern, which is a reversal pattern. The double bottom would be confirmed if prices break above the recent high a couple of days ago.

Regarding the psychology of the dead cat bounce pattern, is that after a distinct and quick reversal of prices from recent highs you have 2 groups of market participants who create demand in the market. Firstly you have those who were short covering their short positions to take profits, and secondly you have those who are looking for a bargain buying at what they think is the low. So for a few days you have the bulls taking over the bears.

Then as more less positive news comes in, the bears hit the market again. These are more participants opening short positions, but more so those who missed out in selling previously because prices fell too quickly, seeing another opportunity to sell at a better price. So the bears take over again.

Unless there is very good news around the corner it is likely that the bears will stay in control and prices will fall further.

How to trade a dead cat bounce (assuming you have been stopped out of your long possistions already)? If you are aggressive you can go short as prices start reversing from the top of the bounce (with your stop loss just above the top of the bounce). If you are more conservative you would place your entry for a short position just below the support at the start of the bounce (with your stop above the top of the bounce). You could also place an order for a long position above the top of the bounce if a double bottom eventuated. A One Cancels the Other (OCO) would be an appropriate order for such a situation.

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