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Bear Trap Is Set - But Will It Close? at Trader’s Narrative




Bear Trap Is Set - But Will It Close?


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I was looking at some charts and noticed that the 1982 super bull market bottom was actually a classic “bear trap”:

SPX 1982 bottom bear trap

This is where price breaks down below the support line (green), making a new low (red arrow) but then reverses quickly above the support (now resistance) and then continues higher. That little blip you’re looking at was the last throes of the bear market that tore through portfolios all through the 1970’s and early 1980’s. It was the last chance that investors had to buy shares at those depressed prices because from then on, from a long term view, the market marched relentlessly higher.

Those that shorted into the new break-down, had to (sooner or later) cover at much higher prices, and by doing so, propel prices higher. As well, those on the sideline were seduced by the new bull market to put their money to work on the long side. And a trend was started.

What we see in the short term as a “bull trap” can also be viewed as an engulfing candlestick formation on a weekly or monthly perspective. Opining about the McClellan Oscillator, this is what I wrote towards the end of February:

Another possible scenario is for the market to pierce the November lows, trapping new bears and crushing them as it bounces up. Always remember that the market is no one’s friend, and it doesn’t owe you anything. In fact, more often than not, it is there to distribute the most amount of financial pain, to the most number of participants.

The market never repeats itself, but it can sometimes rhyme. What I described above was pretty prescient (if I do say so myself!). Take a look at the familiar chart of the recent S&P 500 Index (SPX):

spx 2009 bear market trap question

Of course, if we draw the support line differently, by having it coincide with the January 2009 low, then we see that the November 2008 low was a failed “trap”. And obviously this pattern could also find a similar end. No one really knows the endurance of this recent rally. As I pointed out, one of the characteristics of this bear market has been a remarkable lack of any real counter rallies.

But in some pockets of the market like the tech sector and the semiconductors especially, there is a speculative mini-mania. As well, some of the other internal market health measures have become stretched as a result of this rally - just at previous resistance levels. This is the real test of the nascent rally then. There is no question that we have seen a considerable degree of the bear market and put it behind us - at least as far as any historical measure can tell us. The real question is how protracted the healing and recovery will be.

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6 Responses to “Bear Trap Is Set - But Will It Close?”  

  1. 1 blues

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    Maybe a start of a multi-month rally, but in the end, still just a bear market rally, no way a new bull market start. Only bear market rally you get a 20% up move in 2 week. When we start new bull market it shouldn’t be this violent… Also, I see we are in a long term bear market, so at best, we go sideway for a while… No way in hell we get a ‘V’ shape recovery, there’s simply no justification… also, in the end, I see destruction of America and American government… FED has started the death wish path already by buying treasury, monitizing our debt… I totally agree with Karl…

    http://market-ticker.denninger.net/archives/882-Actions-Have-Consequences.html

    And also

    http://market-ticker.denninger.net/archives/879-Bernanke-Inserts-Gun-In-Mouth.html

    Sorry to be a citizen, may start thinking moving to other country… sorry to say, but “death to America”…

  2. 2 JeffreyLin_FINZ.tv

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    nice read. seeing double bottoms all over the place on big sector & emerging market etfs weekly charts. not sure if it’ll shoot straight up as you’ve so artistically drawn into that S&P chart with a green up arrow! but definitely looking for support on pullback to buy into…wont fight it if we take anotehr leg down…but broad scan shows higehr lows in many key stocks and industries (away from financials!)

  3. 3 Jim

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    I find myself checking your blog daily lately - you seem to have a lot of good insights.
    Looking at the 1981-1982 chart, it looks like there was a failed bear trap in March 1982 where it snapped back for a few months after plunging below the Sep 1981 low. However, a rally of a few months is still plenty to scar the bears, because it’s the stocks they are most short that will usually be responsible for such a bounce.

  4. 4 Ray Sanchez

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    It looks like we have met resistance at the 50 period EMA. Hopefully, we can see a breakout and continue upward as your green arrow implies. I’m glad I have found your blog, it is pretty interesting. :)

  5. 5 maurice e murphy

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    Blues is right.No market ever recovers in a v.Long time ago W D GANN said markets that move up fast reverse 75-100% percent of the move.if you use moving average 8 of them 10-21-40-70-90-125-190-250 all eponential you will see time lines for failures and bulls.The market moves up and slowl lands on the 10-21 as its transverses upward.Just take a look at the inverted chart of interest rates on the 30 year bond.They are slwoly attacking eacm MA.Excep fo r the stupid attempt by the fed rates are going up and they cant stop them.In a few years they will be the highest in years and we will wonder why.Government interventions

  6. 6 M3KW9

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    Pointless… you’re pointing out one of many “bear traps”… you actually can write an article for each one of these patterns.

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