Bear Trap
A false technical signal suggesting further price decline that lures short sellers into positions before prices reverse sharply higher.
What is Bear Trap?
A bear trap occurs when a downward price movement convinces traders that a security is entering a sustained decline, prompting them to initiate short positions — only for prices to reverse upward sharply, forcing short sellers to cover at a loss. Bear traps often form when prices briefly breach a key support level on insufficient volume before snapping back above it, fooling momentum traders into bearish entries. Technical analysts look for low-volume breakdowns, bullish divergences in oscillators such as the RSI, and rapid price reversals as warning signs that a move lower may be a trap rather than a genuine breakdown. Bear traps are most common in highly shorted stocks and during volatile, news-driven markets.
Example
A stock trading at $50 briefly dips to $47, breaking below its 200-day moving average on light volume. Bearish traders initiate short positions expecting further decline. Within two days the stock rockets to $58 on stronger-than-expected earnings, triggering a short squeeze and significant losses for traders caught in the bear trap.
Source: Investopedia — Bear Trap