The Bear Trap Resets
Big Oversold Bounce Sets The Trap, But Will There Be Strong & Sustained Upside Follow Through?
The Bottom Line
The bearish double-top reversal play we are tracking only saw modest follow through last Monday (for less than -1%), before getting bear trapped.
The trap now needs to hold under pressure and not be reopened again. As with all traps, the stronger the upside follow through and away from this trap, the better.
The Price Action
After five straight negative weeks (its longest losing streak since 2022) plus last Monday weakness, the S&P 500 fell -9.79% intraday from the January 28th 7002 high.
Following five straight down weeks, price became so extremely oversold, conditions were ripe for the price action to improve. The following is a note I shared last Monday morning showing how extremely oversold price became:
And, improve it did over the next three days, closing the four-day, pre-holiday week up +3.4% for its best week since late November.
Upon hopes for a speedy end to the Iran war, buyers swiped back control producing one of more the more successful T3s (TACO Turnaround Tuesday) since last year.
What was far more interesting was the resilient price action last Thursday. Price gapped significantly lower at the open in reaction to Trump’s “No Taco, More War” speech and then bounced right back (albeit on lighter volume) in spite of the news.
That’s a positive. When prices rally when the news is bad, it is the first sign of many that things are starting to improve. It is what we always try to look for as a sign.
Yet, the market was overdue for something to go more right than wrong after five straight down weeks and that’s the way it played out last week. What matters far more is whether last week’s strength is sold or bought into in the week to come.
The Bear Trap
On a price action perspective, last week’s bounce is attempting to set a new, major bear trap.
For those readers who are unfamiliar with this pattern, a bear trap is when price moves below a prior level of importance (this time below triple range supports as shown below) only for price to then spring back above them again.
This keeps the bearish double-top reversal out of play AND provides the foundation in this case for a post-correction recovery.
We’ve seen bear traps so many times, not only at the index level, but in stocks, too. So much so I set price alerts in everything I watch to potentially identify and trade upon such setups after they appear.
From false moves follow fast moves in the opposite direction.
Perhaps you’ve heard that before?
This has been the structural price foundation of the bull market uptrend.
In this setup, this new bear trap is fairly significant in size and importance, laying the price action foundation for a nearly full recovery back to the January high with two measured moved targets at S&P 6902 (+4.7%) and S&P 6986 (+6.1%).
Providing we now see strong and sustained upside follow through to confirm it.
Always try to remember…
