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For instance, yesterday, they had a chart in their newsletter showing that for the last three weeks, crypto’s been seeing net inflows of capital, which should be quite bullish, especially if those inflows continue.

The S&P’s had a great year so far—up 10% from the start of the year and breaking new highs.

Jesse posted this chart showing the $VIX (volatility in the S&P) is bullish. That’s typically not a great sign for the S&P.

Are we seeing a bull trap?

What is a Bull Trap?

A bull trap is when price breaks above a key resistance—like an all-time high—and breakout traders buy it, only to have it fall below the key resistance again.

The S&P 500 is forming a potential bull trap here:

1. Price broke above the previous highest close.

2. It put in multiple closes above it.

3. Now, it’s testing to see if it will close back into the previous range and below the trending dots.

If that happens, then all the bulls that bought the breakout are trapped underwater.

It’s also possible the price springs off the previous high, and goes higher.

What’s a bear trap?

A similar thing can happen to bears.

Bitcoin recently gave an example of a bear trap:

1. Price broke below the range low at $61.1K.

2. Bears shorted the breakdown

3. Price regained the $61.1K line

4. Now, any bears that shorted below the range lows are trapped.

How do you trade a trap?

Traditionally, the target for a bear trap is the range highs.

A bear trap is the market taking liquidity below the range, which often means the next biggest pool of liquidity is the area above the range.

There are a few different entries on a bear trap:

1. Enter when price re-enters the range with stop at the wick

The first entrypoint is when price breaks back into the previous range. In that case, you might put your stop below the wick of the bear trap.

The downside: price could get rejected at the previous range low and continue lower. This is why we have stops.

2. Enter when price retests the range lows.

Another entry is to wait for a re-test of the range lows for an entry, if it comes.

This would form a higher low.

If you were being aggressive, you could place your stop below the higher low. Or if you wanted a wider margin for error, you could place it below the lowest wick.

The downside: Price may not retest the range lows, or may continue to breakdown.

3. Enter when price breaks downtrend

The third entry is buying the breakout, when price is breaking the downtrend.

In this case, you might place your stop below the higher low.

The downside: price can move through the breakout quickly if you’re not paying attention, as shorts get squeezed. You’re also paying a higher price for more confirmation versus buying the range low.

There’s no one right setup. They’re tradeoffs. And you have to find the setups that you’re most comfortable trading.

How the trade would look on the S&P

Seeing how it worked on bitcoin, we can apply similar setups to a short on the S&P if this turns into a bull trap.

Please note: I’m not telling you to take these trades. This is for educational purposes only, so you can start identifying these trades yourself and make your own decisions.

Short Targets

With a bull trap potentially underway, we could identify two targets here, if we get a close into the range.

First, we could target the range lows with a stop above the high.

This would give a 3:1 reward:risk. This means the take profit is three times further from the entry than the stop is. It also means you’d need this setup to work out at least 1 in 4 times for it to be profitable.

The second target might be the golden pocket, which also happens to show a gap on the daily chart.

Filling the gap would have a 2:1 reward:risk ratio, so you’d need this setup to work at least 1 in 3 times for it to be profitable.

We can see a similar pattern is playing out on the Dow Jones, which broke the all-time high, and then retraced to the golden pocket so far.

Like I said, I’m not telling you to go make any of these trades. If anything, it’s better to papertrade them and see how they work out for yourself.

Price may breakdown here, or price may go higher. And you’ll never know for sure when you take a trade.

That’s why we look for high probability setups, and we use stops to get us out of a trade when we’re wrong.

Hope that helped. Happy trading!

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Disclaimer

The contents of this newsletter are expressed in my opinion only, none of which is financial advice. Always do your own research as this information is intended for educational & entertainment purposes only.