When a stock falls, only to temporarily increase before continuing on its downward plummet, this is referred to as the ‘dead cat bounce’. Often, this temporary increase has nothing to do with the veracity of the stock, but is a natural phenomenon in the stock market.
The phrase was coined in 1985 by a journalist reporting on the activity, and has been used ever since.
What causes the sudden small jump in price before the stock continues to decline? Investors may have standing orders to buy the stocks, which may have not been stopped before they realized the declining trend that was occurring. The buy orders are completed once the limit has been reached, causing the sudden rise. After the buyers find out about the decreasing stock, it continues on its decline.
Another situation that could cause this to happen is natural reaction from buyers. Sometimes, when a stock reaches a low level, buyers are prompted to make the purchasing; thinking that the stock will raise and they will increase the money that they have invested. Unfortunately, this does not happen very often.
Of course, it can be difficult to tell when a dead cat bounce is occurring, unless you are looking back at trends and graphs, so – when stock prices fall, think hard about buying!