Woodside Petroleum: The Anatomy Of A Bull Trap

The Anatomy Of A Bull Trap

I hate losing money.  And every time I go to the share market there is a chance I will lose money.  Go figure!  In fact, sometimes all your ducks can line up in a row – the stock you want to buy seems like a great investment, in a great trend and you’re already counting the money in your bank.

And then that magic stock of yours plummets like a stone, you’re left with a hole in your bank account and wondering what the heck just happened.

Well I’ll tell you what happened: A Bull Trap.  And someone is on the other side of your trade grinning from ear to ear with the money she just made.  For those of you shouting “What in goodness is a Bull Trap?” – great question!  And here’s the answer.

What Exactly Is A Bull Trap?

A Bull Trap is when a market or stock makes a nice upward move, an entry signal or a breakout from a range, that suckers traders and investors into buying that stock, but then quickly reverses to make you sell again.

There are many reasons this could occur, but the best one is the large institutional investors who need to sell their massive holdings of shares.  They push the price around a little bit by buying here or there, and maybe leaking some good news out into the market place.  And as soon as that “entry signal” occurs and people start buying, guess who is feeding them the stock?  Exactly: The large players or institutional investors.  Once they’ve finished selling their holdings the stock promptly falls due to over supply or under demand.

The Perfect Example

Today was the perfect example of the perfect Bull Trap.  And yes, I got suckered into it.  And yes, I lost money on the trade!  That’s why I want you to learn from my mistake – so you can be aware in the future and not let it happen to you as well.

Woodside Petroleum (WPL), listed on the Australian Stock Exchange made a nice Trend Line entry last week.  It closed above the trend line, and also above the two previous peaks.  It was also on a weekly chart, which means the signal was a solid one (weekly price movements are harder for the large institutional investors to push around and give false entry signals).  It also had reported Earnings Growth that was quite solid – around 35%.  All in all, you would think this was a great buy.

So I bought into the share on Monday at $46.20.  The market fell gradually over the day, but not much.  And then: BOOM!  The news last night was announced that oil giant Shell had sold down a massive 10% of the company’s listed shares.  To put it another way, the average turnover of WPL is around 2,000,000, and today it was 90,000,000 – all sellers.  This was huge.  And the stock tanked, stopping me out at $43.00.

The shares I buy will usually be held for between 3 months and 24 months.  This one was stopped out in a single day.  And as I mentioned before, Shell was on the other side of the trade grinning from ear to ear with the price they sold for.

How To Avoid A Bull Trap In Your Trading Or Investing

As you should know by now, every loss you have in the markets yields a lesson for you.  And I learned this lesson.  It was nowhere near the most expensive lesson I’ve learned, and you get to learn it for free!  Let’s look at the WPL trade to see where I went wrong.

You see in the pictures below, the entry signal on a weekly chart looked solid.  The market closed near the highs for the week, and it was comfortably above the previous two weekly peaks.

But the Daily chart tells a different story.  Now we can see there was only one day that closed above our previous weekly peaks, and it opened high and closed low.  The sellers were obvious here.  And even though the market rose again on Monday – it also closed well on its lows on the daily chart.

Click the charts below to enlarge - they tell the story!

       

So the point is: Make sure the Daily Chart looks as good as the Weekly Chart.  By this I mean you should be seeing constant growth – creeping up nicely on the Daily chart as well as the Weekly Chart.  OR, if a great announcement has just happened or an earnings upgrade, make sure the move is sustained – closing on its highs and not closing on its lows.

Following Your Gut Feel

Under no circumstances would I recommend following your gut feel in the markets.  Sure, I know some people who can do it and get great results, but it mostly leaves me with less money in the bank account when I deviate from my trading rules.  But having said that, there was something about this trade when I took it, that just felt wrong.  I couldn’t tell you what it was at the time, but I know now, and it will be very hard to fool me twice!

Another lesson learned in the markets – and that makes me happy.

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November 9, 2010  Tags: , , ,   Posted in: Articles On Building Wealth

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