Dead Cat Bounce
In finance, a dead cat bounce is a small, brief recovery in the price of a declining stock. Derived from the idea that “even a dead cat will bounce if it falls from a great height”, the phrase, is also popularly applied to any case where a subject experiences a brief resurgence during or following a severe decline. A dead cat bounce is a temporary recovery in share prices after a substantial fall, caused by speculators buying in order to cover their positions.
A dead cat bounce is a small, brief recovery in the price of a declining stock. Derived from the idea that “even a dead cat will bounce if it falls from a great height”, the phrase, which originated on Wall Street, is also popularly applied to any case where a subject experiences a brief resurgence during or following a severe decline.
A “dead cat bounce” price pattern may be used as a part of the technical analysis method of stock trading. Technical analysis describes a dead cat bounce as a continuation pattern that looks in the beginning like a reversal pattern. It begins with a downward move followed by a significant price retracement. The price fails to continue upward and instead falls again downwards, and surpasses the prior low.
The standard usage of the term refers to a short rise in the price of a stock which has suffered a fall. In other instances the term is used exclusively to refer to securities or stocks that are considered to be of low value. First, the securities have poor past performance. Second, the decline is “correct” in that the underlying business is weak (e.g. declining sales or shaky financials). Along with this, it is doubtful that the security will recover with better conditions (overall market or economy).
Don’t fight the tape
Don’t fight the tape is a term used in finance. It means do not bet or trade against the trend in the financial markets, i.e., if the broad market is moving up, do not bet on a downward move. The term “tape” refers to the ticker tape used to transmit the price of stocks. It is analogous to the trader’s maxim, “The trend is your friend.”
Trend is your Friend
A market trend is a perceived tendency of financial markets to move in a particular direction over time. These trends are classified as secular for long time frames, primary for medium time frames, and secondary for short time frames. Traders attempt to identify market trends using technical analysis, a framework which characterizes market trends as predictable price tendencies within the market when price reaches support and resistance levels, varying over time. A trend can only be determined in hindsight, since at any time prices in the future are not known.
A popular trading expression is “the trend is your friend.” This expression has stood the test of time because trends are critically important to any trading plan.
Market Sentiment
Market sentiment (also known as investor attention) is the general prevailing attitude of investors as to anticipated price development in a market. This attitude is the accumulation of a variety of fundamental and technical factors, including price history, economic reports, seasonal factors, and national and world events.
If investors expect upward price movement in the stock market, the sentiment is said to be bullish. On the contrary, if the market sentiment is bearish, most investors expect downward price movement. Market participants who maintain a static sentiment, regardless of market conditions, are described as permabulls and permabears respectively. Market sentiment is usually considered as a contrarian indicator: what most people expect is a good thing to bet against. Market sentiment is used because it is believed to be a good predictor of market moves, especially when it is more extreme. Very bearish sentiment is usually followed by the market going up more than normal, and vice versa.
Market sentiment is monitored with a variety of technical and statistical methods such as the number of advancing versus declining stocks and new highs versus new lows comparisons. A large share of the overall movement of an individual stock has been attributed to market sentiment. The stock market’s demonstration of the situation is often described as all boats float or sink with the tide, in the popular Wall Street phrase “the trend is your friend”. In the last decade, investors are also known to measure market sentiment through the use of news analytics, which include sentiment analysis on textual stories about companies and sectors.