Special Starting Points—The Down Gap and Its Dead Cat Bounce

A stock that is hit with major negative news, and suffers a large down gap on the next daily price bar, will often experience an attempted recovery over the next few days. How do we know if the recovery is to be trusted and may be traded, or if it's just a “dead cat bounce,” meaning that price still has a lot further to go to the downside? I've found that there is a special MIDAS resistance curve to answer this question. It's the curve started from the bar immediately prior to the down gap. If the recovery breaks up above this curve, then it's real, and can be traded; but if the recovery doesn't break the curve, but rolls over and starts to head down again, then it was just a dead cat ...

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