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| I often see markets break upside resistance, consolidate a few days and then drop significantly. That's a "Bull Trap." The bulls or longs in the market got trapped when they thought the "breakout" above resistance line meant higher prices. Also called a "false breakout."
The reverse is true with a market going down and breaking support lines. Then it's called a "Bear Trap."
The general rule to follow is if a market is extended, that is, has gone up for several days or weeks--do not buy. This is usually a good time for the speculator and the farmer (cash crop) to do some selling. You've heard the commentator say: "Lots of profit-taking today." That's often very true and especially if the market has had a good run-up. Why would the pro want to set through a pullback or correction? He's taken his profits and looking for a buy point during the dip or pullback
It's psychologically easy to buy an extended market. It's psychologically difficult to buy market dips--like the pros do. Sometimes the dips keep dipping ! The pro then gets out quick with small loss--CONSISTENTLY--and the amatuer usually keeps hoping and eventually takes a big loss.
Don McCullough | |
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Bear traps and Bull traps
