The anatomy of a bear trap

Initial Reaction post from 2:32 pm today

Under the first chart of the post...

" This looks like an intraday bear flag, watch for gaming of this flag such as a break below to a new local low followed by any upside activity, which would create an intraday bear trap."


We could be discussing bull traps as we have seen some of those as well, especially when we were putting together core short positions from March through May 1, we used bull traps (BIDU being a perfect example) to enter shorts on the trap's price strength.

One thing I like about the market is it is fractal, patterns that we may see, like the bear trap on the daily chart of May/June, will also play out on an intraday chart or even a weekly chart, the reason? Because these are based on taking advantage of human emotion, psychology and technical analysis.

For instance, here's the bear trap of May/June on a daily chart.

This shares many of the same features of today's intraday bear trap. Both of these were bear flags or to be more precise, bear pennants as the flag part of the formation was a triangle/pennant. First the flag pole which is the decline, this gets emotions and sentiment on the bearish side, humans and traders especially don't quickly adjust to changes in the market; for the most part people have opinions and they think that changing their opinion is admitting they were wrong. Over the last several months if you had information that gave you cause to change your opinion and you didn't, you probably lost money.

Next the flag or pennant portion of the bear flag set up, that's the triangle (I don't know why, but most of the bear flags we have seen have formed pennants instead of flags, but they serve the same purpose). The flag tells traders that it is a consolidation/continuation pattern and the next move is going to be a new leg down, some traders will enter on the flag formation, others will want price confirmation of a break below the flag. We identified this as a trap long before it broke down and were able to use the price weakness to establish hedging long positions. When price broke below the pennant, volume increased as shorts now had price confirmation. If you don't have the tools like 3C to tell you what is going on, then waiting for confirmation is a good idea, however the move in this market have been so fast that waiting for confirmation usually means you are entering right at the trap reversal.

In yellow, price moves up after the shorts have already committed and anyone short within that range is at a loss.

Today we saw the same thing, except on an intraday basis and I only point it out so you know how the market really works and how you can use this to your advantage.

 Here's the flag pole of the bar flag (the decline) and then the flag/pennant forms, the psychology is exactly the same as above. Traders want to see declining volume during the formation of the flag, that's what they saw in both instances.

 Then the confirmation, the break below the pennant and volume picks up as shorts see this as price confirmation-the trap is set.

Remember I said watch out for the SPY $134 area for a trap/short squeeze, that's the red horizontal trendline. As price breaks above that level which is a whole number so there will be stops there based on that alone, but it also moves ABOVE the pennant, shorts are at a loss, they start to cover as the snow ball effect takes over and that can be seen in volume to the right. Just like the chart above, any current short that entered today on this price action within the yellow area, is now at  loss.

Obviously buying the break below the pennant offers a good price entry and ultimately lower risk. 3C was showing us many signals that there was accumulation by smart money in to this trap, that's your edge in knowing that the probabilities are on your side when buying the trap.

This is a technical price pattern described almost 100 years ago and Wall Street has been manipulating it increasingly for the last 10 years, traders just won't adjust, making them very predictable and this is where it helps you, that makes Wall Street's response more predictable.