Traders often fall victim to so-called ‘bull traps,’ and Wednesday’s activity in SIGA Technologies (SIGA) shares might be another example. This is why SIGA is our ‘Stock of the Day.’ SIGA has seen heavy trading due to increased interest in Mpox (formerly known as Monkeypox). SIGA develops treatments for this disease. However, the New York-based company’s disappointing trial data for a Mpox drug released on Thursday, August 15, caused the stock to plummet nearly 20%. Despite this, the stock surged over 15% early Friday.
But what exactly is a bull trap? A bull trap is essentially a false breakout. It gives the impression that a stock is about to break through resistance and continue upward. However, sellers quickly overwhelm buyers, pushing the stock back below the resistance level. Resistance represents a group of traders and investors attempting to sell shares at or near a specific price.
The chart shows that SIGA has encountered resistance around $10.50. Stocks often reverse direction and head lower when they hit resistance. This occurred with SIGA in late July and early May. This happens because some sellers who were contributing to the resistance become worried that other sellers will undercut their prices. They know buyers will go to whoever offers the lowest price, so they reduce their asking prices. Other sellers see this and do the same, creating a snowball effect that drives the price down.
Sometimes, however, a stock breaks through resistance and moves higher. This breakout can signal a bullish trend, indicating that the sellers who created the resistance have either finished or canceled their sell orders. This means a significant portion of the available shares is no longer for sale. If buyers enter the market, they’ll struggle to find sellers, forcing them to raise their bids. This price action can propel the stock into a new uptrend.
But sometimes, the stock trades above resistance, mimicking a breakout, only to be a ‘head fake.’ The sellers, who were on the sidelines, return to the market, outmaneuver the buyers, and push the price down. This is the ‘false breakout’ or ‘bull trap.’ However, shrewd traders can profit from these situations by shifting from long to short positions.
Bull traps can be a contrarian signal, often followed by substantial downward movements. SIGA might be poised to enter a downtrend. This recent volatility makes SIGA a stock to watch closely, as traders navigate the potential for a bull trap.
