Point and Figure
One of the most reliable chart patterns.
Bull traps occur when an upward breakout retreats back below a resistance level. Resistance is normally associated with two/more equal highs or an earlier major high.
- Bull traps should be traded in a down-trend.
- They may also signal reversal after an extended up-trend.
Go short when price falls back below the resistance level.
Bear traps occur when a downward breakout retreats back above a support level. Support is normally associated with two/more equal lows or an earlier major low.
- Bear traps should be traded in an up-trend.
- They may also signal reversal after an extended down-trend.
Go long when price rises above the support level.
Bull and bear traps (and false breaks) often
occur in longer time frames as well.
Ford Motor Co. displays a bull trap that took more than a year to complete:
- Price spiked up to a new high, in early 1998, but quickly retraces.
- Resistance forms just below the previous high. The strong following correction is a bearish sign.
- Bull trap: Price rallies to a marginal new high but then retreats below the new support level.
- A short retracement confirms the trend change.
- An equal lower high confirms resistance has formed at 32.00: the low before . A strong bear signal.
- Another attempted rally peters out.
- Equal highs in a down-trend are a strong bear signal; and are followed by a long downward spike.