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The inverted dead-cat bounce is the name for this event pattern. Price makes a dramatic rise,
from 5% to 20% or more, before declining at a more leisurely rate. For more information see pages 844 to 854 of the
book Encyclopedia of Chart Patterns, Second Edition
and the following...
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 Inverted dead-cat bounce
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Identification Guidelines
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Characteristic |
Discussion |
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Price rise |
Look for an event that causes
price to jump at least 5% but it can be 20%, 50%, or even higher. Avoid those stocks with takeover rumors as they tend
to stay high or move even higher. |
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Higher high |
Price typically moves higher the day following the event.
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Decline |
After that, price tends to
decline. |
Trading Tips
The following is based on
tens of thousands of samples covering both a bull and bear market. Since it uses
averages, your results will vary. Trade it
appropriately for the situation. I have seen a number of cases in which price
continues to climb after an event. Thus, a sale
after the initial price rise might cause you to miss a substantial upward move.
Trade this one carefully.
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Trading Tactic |
Explanation |
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Measure |
Measure the close-to-close
price difference from the day before the event to the event day (the day price
shoots upward). Then match the percentage rise with the one in the left column
below |
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5% rise |
Sell the day after the initial
rise. Buy back in during week 2 for a rise that lasts through week 4. |
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10% rise |
Sell the day after the initial
rise. Price trends lower thereafter. |
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15% rise |
Sell the day after the initial
rise. Price may bottom on day 3. Buy back in and hold until week 4 when price
peaks. |
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20% rise |
Sell the day after the initial
rise. Buy back on days 3 or 11 and sell early in week 2 or week 4. Price trends
downward at the end of week 4. |
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Example
The above figure shows an example of an inverted dead-cat bounce event pattern. Price soars by 28%, measured close
to close. The company reaffirmed earnings projections for the year and said earnings would be at the high end of the
range. A broker downgraded the stock but that did not prevent price from jumping up. Price made a new high a day later
and then started a slide back down. Price reached a high of 15 before dropping to a low of 9.95, a decline of over 33%.
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