Download the Schwab app from iTunes®Close

Trading Up-Close: Bear Markets & Bull Traps

Click to show the transcript

In falling markets, traders need to be on the lookout for what are called “bull traps.” A bull trap refers to a short-term rally during a downtrend that “traps” the bulls who mistook it for the start of a new uptrend. Short-term rallies are actually pretty common within bear markets. As a matter of fact, some of the largest up days in history have occurred in during bear market cycles. Why does this happen? After a prolonged bull market, investors have been conditioned to “buy the dip.”  After a sharp decline, “dip” buyers step in and the market starts to rise a bit. This initial rally then encourages other investors who think the worst is over and become fearful of missing out—creating a cycle of yet more buying. A temporary rise in prices may also force some short sellers to buy back shares to protect their profits, leading to even more buying. At some point, though, traders who held tight through the start of the downtrend will come to see this temporary rally as an opportunity to offload losing positions at a slightly better price. These sales, combined with short sellers re-establishing their short positions at the higher prices, may send stocks back into their pre-rally downtrend. So what does a bull trap actually look like? Here’s a prime example from 2008. At the end of October, the S&P 500 had a large up day, which many traders took as a sign that the worst was over.  But after a few more days of gains, peaking on November 4th, the sellers soon returned and pushed the market to even lower lows.  The S&P 500 ($SPX) dropped 25% from its November 4th closing high to its November 20th closing low.  That’s a massive amount of market damage in less than three weeks. So how do you know if you’re looking at a potential bull trap? We’ll cover that in the next video. 

Why do short-term rallies often occur during bear market cycles and what do they look like? We explain the mechanics behind bull traps and give an example from 2008.

What you can do next

Important Disclosures

Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

This video is made available for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned may not be suitable for everyone.

Schwab does not recommend the use of technical analysis as a sole means of investment research. Past performance is no guarantee of future results.


Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.