Source: shutterstock.com/Anastasiia Skorobogatova
As expected, Israel retaliated against Iran, with futures and U.S. Treasury yields plummeting on news of Thursday night’s attack. This is the fourth time in four weeks that “flight to safety” trade has increased government debt. Of course, this movement has not yet taken root. In the wake of the futures market crash, traders began claiming that what was happening in the futures market was nothing more than a “bear trap.”
In trading, bull traps and bear traps represent deceptive market signals that can mislead investors into making unfavorable decisions, but they work in opposite market conditions.
A bull trap occurs during a downtrend when an asset appears to be recovering, inviting traders to buy in anticipation of a market rally. Then the price will fall again and the buyer will suffer a loss. Conversely, a bear trap occurs in an uptrend, where a short period of price decline causes sellers to anticipate a decline in the market and prompt them to sell their assets. However, the market quickly recovers and sellers are put at a disadvantage as prices rise.
Basically, bull traps lure investors with false promises that the market will go up, while bear traps trick investors with the fear that the market will go down.
I think you can see both here. So far, there does not appear to be any escalation by Iran in retaliation against Israel, but there are other worrying dynamics in the Bears’ favor. The main thing here is of course gold, and I continue to believe that gold’s relentless rise is warning of war and monetary crisis. If this is a bear trap, the money will be confirmed by the sale. Instead, it is firmly rooted.
Collision Alert: There’s a Cow Trap Happening Here
In other words, gold is sending a signal that the fall from the stock futures low was a bearish trap. Now the bull trap is starting to move.
Other defensive sectors also show such dynamics at work. For example, utility stocks are outperforming. S&P500. Utilities are a defensive sector. Why did it perform so well even though the market was past its risk-off period?
During last night’s news, I posted a sequence that I think could play out in the coming weeks. The market is concerned about the situation in the Middle East, but I am more worried about oil prices and the Bank of Japan’s future response.
On the date of publication, Michael Gade did not have (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer and are influenced by InvestorPlace.com. Publishing guidelines.
