Below is the daily chart of Apple (AAPL) with price in the upper pane and # of shares traded in the lower.
You can see after testing the $105 level 3 times back in December and January, it used that last test as a springboard to propel higher as it climbed ~25% in a month, topping in late February. Since then it has been in a choppy, sideways consolidation zone bouncing between its top and bottom (red) rail.
If you look closely at the blue circled area you can see price closed below the support rail on a 50% increase above the average daily volume. Areas of consolidation are stalking grounds for technicians, momentum traders and institutional investors as they are patiently watching for a break out of consolidation, signaling the possibility that a new trend has started. As such when you see a breakout (up or down), volume usually spikes as the quickest jump on the direction of the newly established trend. The earlier you get on the more money you make. That is, of course, it wasn’t a head fake.
You see, the market makers (MM’s) in a stock are playing a chess game against all investors. They are in the business to make money and have survived by knowing crowd behavior and capitalizing on it. Knowing the levels of support are closely watched, especially on a company as well-known as Apple, they have been known to create traps for investors/traders. Let’s use the AAPL example at hand to illustrate a bear trap in action. As price approached the bottom rail the MM’s pushed the market down by selling enough shares out of their massive AAPL holding to have it break below that very important support level (~$122). Those watching the support levels noticed the breakdown and exited their long positions. Additionally some jumped on the other side of the trade in an attempt to catch what they believed was the start of a new trend (down) and piled on short. Since this is normal behavior what do those wily (rich) market makers do? Yup, they reverse it higher the next day above the support line trapping all those who went short the day before. Those that were not in the trade noticed the reversal and jumped on board the long side adding buyers and pushing prices higher. Additionally those that did short were forced to buy back shares to close out their short positions adding a whole lot more fuel to the rally. In the meantime the MM’s sold a few of his massive pile of shares to propel prices higher, in this case it has risen almost $12 in 7 days.
The MM’s got rich …. $12 x a whole bunch of shares is a big wad of cash …… in a very short time. All in a day’s work. This, my friends, is a great example of a bear trap.
In case you were wondering, yes there is a bull trap and many other ways the market can eat you alive. It’s a jungle out there with big game hunters (MMs) armed to take out both bulls and bears.