Thoughts on the Recent Crude Oil Bull Trap

Jun 21, 2013: 9:29 AM CST

We have one more educational lesson to add to our previous “Lessons from Three Bull Traps and Reversal Pathways” post – Crude Oil similarly triggered an initial breakout with divergences then returned back under the breakout trendline, signaling a potential collapse toward the lower support line.

Let’s take a look at this development and add it to the list of “Failed Breakouts and Bigger Moves in the Opposite Direction.”

The Failed Breakout or Bull Trap in Crude Oil USO

Cutting straight to the point, the $98 level was an upper resistance target that corresponded with the January 2013 high along with the falling trendline into $97 per barrel.

Price not only broke above the $97 trendline level but then above $98 to print a new high for the year.

Unfortunately, the breakout was short-lived and the alternate “collapse” scenario triggered on the return back under the $98 then $97 level as seen on the intraday chart below:

Crude Oil Failed Breakout Bull Trap Outcome

It’s vitally important to assess the intraday chart for signs of confirmation (meaning strength in indicators and volume) or non-confirmation (weakness or divergences) to assess the odds of the breakout succeeding (triggering bullish positions) or else failing (triggering stop-losses all the way down).

As we learned from the prior “Bull Trap” post, a breakout that fails tends to lead to a larger than expected – suddenly violent – move in the opposite direction as traders are trapped (forced to liquidate) and short-sellers are pressing their advantage on the failure.

In terms of game-planning, we can never know whether a breakout will succeed or fail but we can plan an alternate trading strategy in the event that we do see a breakout event fail in real time.

If we positioned (got long) into the breakout above $97 or $98 in this case, we had to take a sudden yet small stop-loss to prevent the position from morphing suddenly into a large loss which is often the case on a failed breakout (don’t freeze with “Deer in the Headlights” syndrome).

Even if we took a stop loss or even if we didn’t position into the breakout at all, savvy or aggressive traders can turn a Bull Trap or Failed Breakout strongly to their advantage by playing the failure (alternate) outcome which usually develops as a violent collapse in price straight down toward – and sometimes beneath – a prior trendline or price support level.

Each trade and each set-up like this that we study provides insights for learning how to adapt in real time to ‘surprise’ events and ultimately makes us better traders for learning real-world lessons like these.

Corey Rosenbloom, CMT
Afraid to

Follow Corey on Twitter:

Corey’s new book The Complete Trading Course (Wiley Finance) is now available along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).

1 Comment

One Response to “Thoughts on the Recent Crude Oil Bull Trap”

  1. Viewing the Recent Shift in Money Flow Trends | Afraid to Blog Says:

    […] Oil remained in a visual range, reflecting flat or neutral money flow though a “Bull Trap” occurred just ahead of the recent downside reversal after the Federal Reserve meeting last […]