Are You Trading into a Bull Trap?

Last night, I decided to do a little research. On Monday, the QQQQ's traded 26,927,600 shares. The last time they traded with this type of low volume was over four years ago on July 3, 2006, a “half day” of trading right before the July 4 holiday. As far as a full day of trading, I ended my search after going back a decade when August's worst volume was averaging around 45 million shares per day, and that was when the QQQQ's weren't traded nearly as much as they are now, especially with the rise of "the machines."

Even in August 2009, we averaged well over 100 million shares a day, with some days close to 150 million shares. Volume in and of itself isn't reason enough to maintain a bearish stance. However, one can make the case that when futures failed to confirm a new marginal high in the S&P 500 cash index for August on Monday, this may be nothing more than a bull trap. A bull trap occurs when longs take on a position when a stock is breaking out, only to have the stock reverse and shoot lower. This counter move produces a trap and often leads to sharp selloffs.

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Beware that lower trend line for any break below it!