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In my opinion, in the current state of the crypto market and the looming economic crisis, we need to spend some time and learn new things to become better investors and traders. This article is meant to help readers understand a situation reffered to as "a dead cat bounce". It can be described as a price pattern where at first the bounce may appear to be a reversal of the prevailing trend, but it is quickly followed by a continuation of the downward price move. It becomes a dead cat bounce (and not a reversal) after the price drops below its prior low.
Frequently, downtrends are interrupted by brief periods of recovery, or small rallies, when prices temporarily rise. This can be a result of traders or investors closing out short positions or buying on the assumption that the security has reached a bottom. In our crypto world, it may also be due to upcoming network upgrades or influencers/celebrities (looking at you, Elon).
The tweet from Michael Burry that I linked above should show you exactly why these dead cat bounces are so dangerous for investors looking to jump on the occasion. Short-term traders may attempt to profit from the small rally, and traders and investors might try to use the temporary reversal as a good opportunity to initiate a short position, but they need to be extremely careful.
Similar to identifying a market peak or trough, recognizing a dead cat bounce ahead of time is extremely difficult, even for skilled investors. The most important thing to consider is the overall economic situation and what we can anticipate about the future (like the current Covid, war in Ukraine, inflation situation and the anticipated food shortages in the following months).
As mentioned above, most of the time a dead cat bounce can only be identified after the fact. This means that traders that notice a rally after a steep decline may think it is a dead cat bounce when in reality it is a trend reversal signaling a prolonged upswing.
So how can one predict when it is a dead cat bounce versus a trend reversal? Well, you would need a crystal ball for that! As we discussed in this article, it is extremely difficult to differentiate between the two at the given time, that's why it is so crucial to not try to time the market, but rather prepare an investment plan and stick to it (for example, buy Bitcoin for X$ when the BTC/USD price falls to 19000).
Not financial advice though, everyone can judge what they want to do on their own.
I hope this short article showed you something new and helped you understand the dangers of trying to time in the market. The saying goes "time in the market beats timing the market" for a reason, folks! Stay safe out there!
