From The Right Edge, Just A Thought, Simple Trading Basics

Speaking Of A Bull Trap

There’s lots of talk today about whether or not a Bull Trap is forming.

Let me help you out…

That’s not what’s happening.

The definition of a Bull Trap according to Investopedia:

A false signal indicating that a declining trend in a stock or index has reversed and is heading upwards when, in fact, the security will continue to decline.  [Emphasis mine]

A bull trap often causes some investors to buy the stock, but because the stock continues to decline after the initial signal, those who bought in are “trapped” in a bad investment.

In other words, a Bull Trap is found on the lows… NOT the highs.  

It is seen as a trap because the bullish investor purchases the stock, thinking it will increase in value, but is trapped with a poor performing stock whose value is still falling.

Wikipedia

It appears when traders try to pinpoint a low and buy it because they think the decline is over.

Instead of a Bull Trap, what we might be experiencing is a False Breakout (aka a Failed Breakout).   A Failed Breakout is defined by Investopedia as:

A price movement through an identified level of support or resistance that does not have enough momentum to maintain its direction. Since the validity of the breakout (or breakdown) is compromised, many traders close their positions and the price fails to make the sharp move that many were expecting.

A failed break is also commonly referred to as a “false breakout”.

Failed Break
In this case, price has indeed moved through a level of resistance.  However, price has yet to make a decision as to whether this will be a False Breakout or not.  As of right now, volume aside, pattern and price are suggesting that there is more upside to be had.

Daily — On the daily chart here, price has clearly run away from the previous high that was acting as resistance.  Not so far that it can’t come back to retest that level mind you, but has made quite a run already.

Bull Trap

 

Weekly — This chart provides a better picture of why I suspect price can continue higher.   The many sharp pullbacks as far back as late 2014 have actually led to a broad consolidation above 1800.  I think that means any pullbacks from these highs to the consolidation area will be met with support that likely holds.

Bull Trap

 

 

Monthly – The monthly here shows the consolidation even better.

Bull Trap

 

 

Quarterly – The quarterly chart shows the possibility even better than the monthly.  

Bull Trap

 

We may be indeed in the midst of a False Breakout.

But we are not facing a Bull Trap.

Yeah… I said it.

Tell your peeps...