Trapper Keepers are Cool During Summer School

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After a soft month of May, followed by yesterday’s bull trap and today’s subsequent nasty reversal, one cannot help but conjure up memories of last summer’s correction and grinding trading range. Even during bull markets, bears are infamous for setting and properly executing vicious traps during those long and hot summer market months.

On the morning of Monday, June 21, 2010, the bulls were feeling pretty sure of themselves. They had survived the flash crash six weeks prior, and the S&P 500 had apparently just broken out from a steep downtrend. The market gapped open higher that day, and exuberance was in the air. Of course, by the end of the session we had closed in the red. It ended up being not just a one-day trap, but a trapper “keeper.” Over the next two weeks or so, it was a straight line down to the final summer low of 1010 on the S&P. Even though that was “the bottom,” many traders got badly hurt on the way down. Moreover, even though that was “the bottom,” there was quite a bit of backing and filling and directionless trading until Labor Day.

Applied to the current market, although we did not see an intraday reversal yesterday, we closed at the highs of the day, and even opened today in decent shape before cratering. Thus, a reasonable comparison can be drawn in terms of declaring today to be some type of major trap over the next week or two, at least. However, as fun as it may be to speculate on significant traps and reversals, the bottom line is that the bearish engulfing candle on June 21, 2010, required confirmation in order to take any sort of action first.

Similarly, today’s massive selling candle will need another convincing lower low in the next few days in order for one to really extrapolate that this market is doing anything more than simply flopping around like a goldfish plucked out of its tank by a mischievous little kid.

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