Dead Cat or New Bull Market? Play the Bounce Either Way
When I first started trading, I had a unique opportunity to talk to the best of the best.
As a member of the Market Technicians Association, I had dinner with people who traded on the floor of the exchange for 50 years. I also interviewed professionals who worked at Wall Street firms for decades.
One of my favorites was floor trader Mike Epstein. He passed a few years ago, but I’ll always remember the… colorful way he described market action.
This is a family e-letter, so I can’t print everything he said. But I can share his take on the “dead cat bounce.”
This phenomenon can fool many investors into thinking the bottom is in, only to watch as the stock they bought flatlines (or worse, falls even further).
And if you ask me, we’re right in the middle of a far-reaching dead cat bounce that’ll put many investors in the red…
A Classic Case of Dead Cat Bounce
Back in 2015, Mike Epstein and I were in a conference room overlooking Times Square. Another trader was talking about Micron. The stock was falling as techs were rising. He thought the stock was a buy, based on a few indicator divergences.
Mike smiled and pointed to the window. He asked what would happen if you threw a cat off the top of that building.
The Micron bull said it would die. Mike agreed. But he said it would bounce after it hit the ground.
Micron was a dead cat bounce.
I’ve heard the term many times since then. It perfectly describes what we often see after a stock crashes. It’s already dead, but it bounces. And, as Mike would say, “some of them suckers” bounce pretty high.
If you’re a buy-and-holder, dead cat bounces are troublesome at best. But for traders, they’re a great opportunity…
And right now, the price action in the S&P 500 might be a dead cat bounce:
This is a chart of the SPDR S&P 500 ETF (SPY).
Last week’s rally was impressive. SPY gained nearly 5% from its lows on Tuesday. But is this the start of a new bull market, or a classic case of dead cat bounce?
Only time will tell. But as traders, we don’t need to wait for the answer.
Futures are up nearly 1% as I write this Monday morning. If it carries through to the open, it would seem this dead cat bounce still has legs.
So right now, it’s appropriate to start looking at short-term call options. Play the bounce, and be sure to take your gains quick once the market starts to turn.
For the more optimistic bulls, long-term call options dated toward the end of 2022 could deliver larger gains. But they’re certainly riskier, and more expensive.
That’s up to you. If you ask Andrew Keene, it’s better to take the short-term gain, move on to the next trade, and take what the market gives you day by day.
That’s what he’s built his entire trading strategy around — spotting short-term bounces and capturing quick profits with options.
Strangely, even in this bear market, he’s focused exclusively on call options.
And the gains are nothing to scoff at…
Over a four-month period in 2022, members of Super Options have pocketed gains of 108% in 5 weeks, 116% in 3 weeks, and even 146% in 2 days.
His strategy returned a total of 139%… while the S&P 500 slid 15%.
Again, that’s 100% on call options.
Now, for the first time ever, he’s opening the doors to readers of True Options Masters. At market close on Thursday, he’s going live to tell you everything you need to know…
Including how to trade alongside him through this bear and beyond. Click here now to claim your spot at his free event.
Regards,Amber Hestla Senior Analyst, True Options Masters