USO Bear Trap and Breakout as of October 15

There have been two interesting patterns in the recent chart both in crude oil and in the US Oil Fund (exchange traded fund), including a “Bear Trap” and today’s “Stop Pop” and price breakout.  Let’s take a look.

I have been noting the triangle that has been developing in Crude Oil prices (and, by proxy, the USO ETF) and noted that a downside break seemed to have occurred into late September.

It turns out that this price move, as seen above in USO, was actually a “Bear Trap” which lured in short-sellers (and took away buyers’ stop losses) and then crushed them with a short squeeze which actually broke to the upside of the triangle into fresh new highs for 2009.

The lesson I can give you about Bear Traps is that they are generally impossible to foresee ahead of time (that’s why they’re called traps!) but you CAN take advantage of them by recognizing when the trap is sprung and playing part of the rally that comes after bears/sellers are caught in the squeeze.

I discussed this strategy in part in last night’s post “A Look at the 12 Most Recent Failed Sell Signals in SP500.”  There’s an upward bias that seems to be far more powerful than any sell signal the charts can offer us.

Many times, there is a larger move in the *opposite* direction after a valid sell signal is busted by upwards movement.  This takes quick thinking, an open mind, and an acceptance that supply and demand (not our opinions or the charts themselves) control prices.

Busted Sell Signals in various markets (especially the stock and commodities markets) are quite painful to swing traders, but there is opportunity in the intraday frames for quick traders able to take defensive (or even offensive) action after a well-known and valid sell signal is busted.  Often, this skill is only developed through experience (and being on the wrong side of sell signals).

Use this as an example of the “Bear Trap” and the “Popped Stops” concepts and trade set-ups and remember that anything can happen in the market (that’s where stop-losses come in!).

Corey Rosenbloom, CMT
Afraid to Trade.com

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