Dead Cat Bounce: The price trap every trader needs to know in the crypto market

Have you ever witnessed a sudden rally during a bear market, feeling excited then… getting “shaken out” heavily? That is the dead cat bounce — a common phenomenon in cryptocurrency trading but one that can cause significant damage to those who fail to recognize it.

Not Every Price Increase Is a Good Signal

In a prolonged downtrend, sometimes you’ll unexpectedly see a coin surge, with prices soaring and trading volume skyrocketing. At this point, inexperienced investors often hastily click “Buy,” believing it’s the start of a genuine recovery.

But in a flash, the price reverses, and buyers are left holding red bags. What happens is a downtrend interrupted by a short-term rally. That is dead cat bounce — a temporary rebound in a declining trend.

The name might sound funny, but it’s a very dangerous continuation pattern in technical analysis. It can occur with any asset after a long-term decline, not just during a market-wide downturn.

How to Detect a Dead Cat Bounce Early?

First, you need to understand: In reality, it’s impossible to be certain that a dead cat bounce is forming while it’s happening.

When prices suddenly rise after a deep dip, all technical evidence suggests it could be a genuine recovery. But to confirm a dead cat bounce, you must wait until the price breaks the previous support level and continues to decline.

The problem is: by the time you’re sure it’s a dead cat bounce, it’s already too late. Investors who bought during the “recovery” will get trapped.

This is why experienced traders are always skeptical of sudden price surges during a downtrend. They know that, in this volatile crypto market, a rebound during a bear phase is highly likely to be a dead cat bounce.

How Does a Dead Cat Bounce Form?

There are several main reasons:

Short-term speculation: A group of traders start closing short positions or begin buying, believing the bottom has been reached. If this attracts more buyers, liquidity increases and prices naturally jump.

Triggering a domino effect: When traders see prices rising, others join in buying, creating a small bubble in the short term. This rally lasts until selling pressure takes over.

Profit-taking by sellers: Those who shorted early or want to exit their positions will front-run this rally to take profits, after which selling volume spikes and prices collapse.

Recognition Mechanism: The Clues to Watch

A dead cat bounce officially forms when the price drops below the previous low. In other words:

1. The price experiences a prolonged decline
2. Suddenly surges (that’s the “bounce”)
3. Then reverses again and breaks the old low
4. Continues the initial downtrend

Short-term recovery phases during a bear market are very common. But when one of these rebounds breaks the old support level, you can be sure it’s a dead cat bounce.

Is a Dead Cat Bounce Good or Bad?

It’s not always bad.

For those buying during the recovery: They will lose money if they take profits too late. They are the group most negatively affected.

For experienced traders: A dead cat bounce can be an opportunity to profit. If they spot this pattern early enough, they can:

• Enter long trades while prices are rising, then sell at the top
• Or short the market from the dead cat bounce peak

The Key Point: A Warning for All Traders

A dead cat bounce is a phenomenon that frequently occurs in the cryptocurrency market, especially during prolonged downtrends. It can happen with any coin, regardless of the overall market condition.

The danger of a dead cat bounce is that no technical indicator can reliably signal that a recovery will turn into a dead cat bounce. You only know for sure after it has happened — and by then, it’s usually too late.

Advice: If you lack sufficient experience, be very cautious of sudden price increases during a downtrend. Sound risk management and strong trading psychology are always more important than any technical pattern.