Dead Cat Bounce
Are we setting up the fall-leg (sell-off) of a Dead Cat Bounce?
Let’s chart the @ES (eMini) and @TF (Russell 2000) futures contracts on the hourly basis.
We’ll start with the @ES:
During this morning’s live Market Briefing with TradeStation, I highlighted the potential for a “Dead Cat Bounce” pattern to complete to the downside in the @ES.
Sign up for our Newsletter & get the FREE eBook
Retirement Day Trader:
How to Sell Weekly Options for Steady Income
I’m showing the @ES continuous contract – overnight data included – and the “Arcs” that plot a pathway for price.
Note the “Rounded Reversal” that propelled price higher from 1,860 to 2,000 and the negative divergences in momentum and volume that accompanied the rally at the highs.
Yesterday and now especially this morning gave us a downward swing away from the 2,000 level.
If the “Dead Cat Bounce” pattern completes, it suggests price could continue falling all the way back to the 1,860 level as the correction (retracement) retests the prior lows.
Of course, any “interrupt” in this pattern – meaning perhaps we support-bounce here or immediately off 1,900 – suggests that the Dead Cat Bounce pattern would not complete its full retest-of-the-lows target.
We’re seeing the same thing in the @TF Russell 2000 intraday index (for example):
Similarly, the Russell 2000 (NYSEARCA:IWM) futures contract bounced up off the key 1,100 level but stalled recently into the 50% Fibonacci Retracement as drawn just above 1,160.
Price gapped lower and traded “down away” from this key pivot at 1,160.
Should the pattern complete – meaning price remains under 1,150 – then it could lead to another test of the 1,100 level.
This is just a simple pattern to measure the current and potential future pathway for price – and thus craft trades.