What is a dead cat bounce ?

After a sharp fall in prices, in a bear market, prices will sometimes begin sharp and swift rallies. Such rallies are called a ‘dead cat bounce’.  The term suggests that the rally is likely to be a short term phase.

The term was created when day trading was not a trading feature. There were no computers or real time data. Positions were taken for days, weeks and months. After a bear market decline, prices would begin a rally, which was likely to face resistance sooner or later, hence a dead cat bounce.

The bounce then, did not refer to one day or a few hours. It referred to an upswing which was likely to fail. My point is this: How can we say that today was a dead cat bounce and the rally is complete? We should expect a short term uptrend. The bounce did not refer to one day, it referred to an up move that was likely to fail.

The up move from 4950 – low to whatever high is made is likely to be classified as a dead cat bounce, but it is not just one day.

Rally fades out: Intraday update

The first 15 minutes high has not been broken till 1.45 PM. There has been no buy signal yet. While a breakout from consolidation can still give a buy, it would be a weak signal since the breakout will come much below the first 15 minute high.

Following a set of rules will usually keep us out of trouble. I have discussed the 15 minute rule many times in this blog. Just do a search using the search option available in this page. This simple method ensures that many of my orders will not get triggered because the market never follows through above the first 15 minute high or low.

If you are trading, then have a set of rules. Keep it simple, but follow it.

Big up day likely

With American markets rallying big time, almost 4% +, we can expect the Nifty to open with an up gap, then, stay higher. It now seems that 4950 will act as a short term low.

Trading ideas:
1. Opening Range Breakout. use the first 15 minutes as the support and resistance range. Buy above resistance with stop under support.
2. On intraday declines, look to sell PUT options. This may work since implied volatility was very high on Tuesday. I.V’s could come down on wednesday but may still be high enough to be sold into. See my earlier post on this trade.
3. Buy Futures on intraday consolidation / dip.

Manage your trade carefully. Do not take unnecessary risks. Keep volumes low.