World Blog by humble servant.A bull trap is essentially the same thing as what I described earlier as a bear market rally — just a shorter, more street-level term for it. “A bull trap = counter-trend oversold snap-back, but the market is still fundamentally weak. Leaders fade.”
A bull trap is essentially the same thing as what I described earlier as a bear market rally — just a shorter, more street-level term for it.
You nailed the exact mechanics in your one-liner:
“A bull trap = counter-trend oversold snap-back, but the market is still fundamentally weak. Leaders fade.”
Let’s break your description down — it’s actually perfect:
- Counter-trend
The broad market is still in a downtrend (lower highs, lower lows). The rally goes against the primary trend.
- Oversold snap-back
After a brutal leg down, almost everything is extremely oversold (RSI < 20, put/call ratios at extremes, VIX spiked, etc.).
Short covering + dip-buyers + FOMO algo chasing creates a violent, sharp upward move — often 8–20% in just days or weeks. It feels like the trend has reversed.
- But the market is still fundamentally weak
Earnings are still rolling over, rates are still rising, credit spreads are widening, or whatever the original bearish catalyst was hasn’t actually been fixed. The rally is purely technical/reflexive, not fundamental.
- Leaders fade (this is the tell-tale sign)
- Early in the rally, the former leaders (FAANG in 2022, banks in 2007–08, cyclicals in 2000) rip the hardest → everyone says “risk-on is back!”
- Then, one by one, those leaders roll over and start making lower highs while the indexes are still going up on the backs of defensive/laggard stocks.
- When the real leaders (the stocks/internals that are supposed to carry a healthy bull) stop participating or break down, the rally is living on borrowed time. The trap is fully set.
A bull trap is essentially the same thing as what I described earlier as a bear market rally — just a shorter, more street-level term for it.
You nailed the exact mechanics in your one-liner:
“A bull trap = counter-trend oversold snap-back, but the market is still fundamentally weak. Leaders fade.”
Let’s break your description down — it’s actually perfect:
- Counter-trend The broad market is still in a downtrend (lower highs, lower lows). The rally goes against the primary trend.
- Oversold snap-back After a brutal leg down, almost everything is extremely oversold (RSI < 20, put/call ratios at extremes, VIX spiked, etc.). Short covering + dip-buyers + FOMO algo chasing creates a violent, sharp upward move — often 8–20% in just days or weeks. It feels like the trend has reversed.
- But the market is still fundamentally weak Earnings are still rolling over, rates are still rising, credit spreads are widening, or whatever the original bearish catalyst was hasn’t actually been fixed. The rally is purely technical/reflexive, not fundamental.
- Leaders fade (this is the tell-tale sign)
- Early in the rally, the former leaders (FAANG in 2022, banks in 2007–08, cyclicals in 2000) rip the hardest → everyone says “risk-on is back!”
- Then, one by one, those leaders roll over and start making lower highs while the indexes are still going up on the backs of defensive/laggard stocks.
- When the real leaders (the stocks/internals that are supposed to carry a healthy bull) stop participating or break down, the rally is living on borrowed time. The trap is fully set.
Classic Bull Trap Sequence (2022 example)
- Jan–Jun 2022: S&P -24%, Nasdaq -33% (brutal oversold)
- Mid-Jun to mid-Aug 2022: S&P +17%, Nasdaq +23% in ~8 weeks → “bear market over, soft landing, Fed pivot” narrative everywhere
- The leaders that had been crushed (Tesla, Nvidia, Meta, Apple, etc.) led the entire bounce
- Late July → early August: those same leaders started fading (Tesla topped July 19, Nvidia Aug 11, etc.) while the S&P kept grinding higher on energy/utilities/laggards
- August 16: final high → September/October: vicious new lows, S&P down another -20% from the bull-trap top
- Jan–Jun 2022: S&P -24%, Nasdaq -33% (brutal oversold)
- Mid-Jun to mid-Aug 2022: S&P +17%, Nasdaq +23% in ~8 weeks → “bear market over, soft landing, Fed pivot” narrative everywhere
- The leaders that had been crushed (Tesla, Nvidia, Meta, Apple, etc.) led the entire bounce
- Late July → early August: those same leaders started fading (Tesla topped July 19, Nvidia Aug 11, etc.) while the S&P kept grinding higher on energy/utilities/laggards
- August 16: final high → September/October: vicious new lows, S&P down another -20% from the bull-trap top
How to spot the trap in real time
- Rally starts with explosive breadth and leadership (good)
- Volume dries up near the top
- Former leaders make lower highs or break rising trendlines
- Defensive sectors (utilities, staples, healthcare) start outperforming
- Market grinds higher on terrible breadth (classic late-stage bull-trap characteristic)
- Then the reversal hits and it’s straight-line crashes through the prior lows
Bottom line: A bull trap is the market’s cruelest trick. It doesn’t just punish bears — it reloads the bears with fresh capital and conviction by sucking in the last cohort of hopeful bulls at the worst possible prices. When the former leaders fade while the indexes are still near their highs, that’s the siren song telling you the trap door is about to open.
- Rally starts with explosive breadth and leadership (good)
- Volume dries up near the top
- Former leaders make lower highs or break rising trendlines
- Defensive sectors (utilities, staples, healthcare) start outperforming
- Market grinds higher on terrible breadth (classic late-stage bull-trap characteristic)
- Then the reversal hits and it’s straight-line crashes through the prior lows
Bottom line: A bull trap is the market’s cruelest trick. It doesn’t just punish bears — it reloads the bears with fresh capital and conviction by sucking in the last cohort of hopeful bulls at the worst possible prices. When the former leaders fade while the indexes are still near their highs, that’s the siren song telling you the trap door is about to open.
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