What Is the Psychological Impact of a “Dead Cat Bounce” on Market Participants?
The bounce can create a false sense of hope for those who bought at higher prices, leading them to hold or even buy more (known as "averaging down"). This is often fueled by FOMO (Fear of Missing Out) from sidelined traders.
When the bounce fails, it leads to a wave of capitulation and panic selling, exacerbating the subsequent decline.
