BULL & BEAR TRAPS

However, breakouts do not always guarantee that markets will continue to extend in a particular direction. If, following Traders’ Remorse, the consensus of expectations is that a new lower price is not warranted, a classic ‘Bear Trap’ (or ‘False Breakout’) is created. This is shown in the following chart:

With EURUSD futures having found good support around 1.2649 on at least four separate occasions at points 1 to 4, the market finally broke through to the downside. However, this created a classic bear trap as downward momentum failed to follow through, leaving sellers ‘caught short’ as the market then reversed. This saw the beginning of an extended uptrend, with prices moving back to their original levels as sellers reversed their short positions – providing additional momentum to the move back up.

Similar sentiment creates a ‘Bull Trap’. Prices rise above a resistance level long enough to get the bulls to buy (or go long) and then move back below the resistance level leaving the bulls on the wrong side of the market and sustaining losses.

Therefore, a good way to quantify expectations following a breakout is with the volume associated with the price breakout. If prices break through the support/resistance level with a large increase in volume and the traders’ remorse period is on relatively low volume, it implies that the new expectations will rule Conversely, if the breakout is on moderate volume and the “remorseful” period is on increased volume, it implies that very few investor expectations have changed and a return to original expectations (and therefore prices) is warranted.