How can I identify a likely bull trap?

Question

Ok, so I've been learning a lot about bear traps recently and think I've got it.

Based on creating a lead in trendline and a sell line to match, and on the cues in the swings, I'm saying this is a potential (or likely) bull trap, but I'm not convinced I've read this right.

It has the peaks, basement, and a lead in trendline but not an obvious floor. It doesn't follow the pattern I expected. If I've got it wrong (in theory), what am I missing here? I guess I'm confused by the scale. Could that first very high peak in the middle of the chart count as a bump followed by bear trap? Or is that a return to the median followed by a new cycle?

Disclaimer: I'm making up words as i go along.

Answer 1

Remember the 1st Law of Technical Analysis: "For every analysis there exists an equal and opposite analysis." And the 2nd Law of Technical Analysis: "They're both wrong."

Technical analysis in the absence of hard data is just a lot of hand-waving meant to dazzle CNBC viewers and rope would-be day traders into paying for colored-plot-filled trading platforms.

How, mathematically, do you define a bull trap? Does the lead in trendline have to have a certain minimum/maximum slope? Does the trough have to be below/above a certain percentage of the peaks? Does the entire period have to encompass less/more than a certain number of trading days? Etc.

Before you attempt to use such an analysis to predict the future direction of a stock price you need to be able to answer the above questions (and more) rigorously. Only then can you test your definition against historical stock movements to see whether it has predictive power. If it doesn't have predictive power, then you start over or tweak your definition until it does.

Notice that once you're done with all of the above work you are no longer doing technical analysis and are now doing statistics!