Bull Trap

A bull trap appears when a brief rally interrupts a strong downtrend only to fall back into the down trend once again. Bulls chase the big counter trend move to the upside and then subsequently get "trapped" when the market continues back to its downtrend following a pull-back from resistance. This is also accompanied by high volatility.

Bulls are trapped because they are typically chasing the big moves in the market and are buying at the top of the correction - as was evident in yesterday's excited buying. Once the market starts to fall, these new bulls try to extricate themselves from the trap by selling. That selling pressure feeds back into the bear market and amplifies the subsequent move back to the downside.

Exiting a bull trap:

As every trader knows, if a trade is going against you, cut your losses and exit the trade. If the trader has gone long on the bounce only to be caught in the bull trap as it plummets south, exit the trade. The smaller your losses are when you are wrong the less they will affect your account.

A bounce off support is considered a buy signal, however if the stock price reverses and breaks support, it is likely that it will continue to go lower. A break below support should trigger your predetermined stop-loss exit. In other words by buying at support or close to it you can easily exit with a small loss if the stock breaks lower, and let it run if it continues to go up and make higher highs.