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A Vicious Bull Trap and Delayed Response to News for United Airlines UAL

Tue, Apr 11, 11:31 AM ET, by Corey Rosenbloom

If you were puzzled as to why United Airlines (UAL) stock didn’t collapse – or at least fall – yesterday, join the crowd.

As word spread via daytime news, Twitter, Facebook, and other sources about the forced removal of a passenger from a flight, the price of UAL actually increased.

Logic – and the bad publicity – would suggest at least a down day when the news broke.

Worse than that, not only was the stock price higher during a negative news cycle, but it also broke resistance into a potential bullish breakout play.

If your head is spinning, look no further to what happened this morning as a vicious Bull Trap triggered and stock prices collapsed more than 4% as word of the incident spread around the globe.

It’s a good lesson in news, expectations, patterns, and trading traps.

Let’s start with the intraday chart to pinpoint the bull trap and collapse outcome:

For reference, this post isn’t about the incident itself, but instead the publicity and reaction in the stock.

UAL shares traded in a sideways range between $70.00 and $71.25 (yellow highlight).

On the negative news day, buyers pushed the stock higher out of the range not once but twice, peaking with negative volume and momentum divergences at the $72.00 level.

Negative news/press aside, this is a divergent situation or non-confirmation of a breakout in motion.

IF volume and momentum FAIL to rise as stock breaks from resistance, odds then favor a reversal.

And what a reversal it was.

This time we have the spread of the negative publicity as a reason for why the stock collapsed, but it did so in the most vicious way (by initially rallying and tricking traders into buying a breakout BEFORE collapsing, as would have been logical to expect).

Here’s the pattern playing out on the Daily Chart and perhaps what to expect next:

UAL shares tumbled in March, falling from a Triple Top (and negative divergence) pattern.

We saw a standard retracement back toward the falling 20 and 50 day EMAs near the $71.00 level.

The logical play would be to expect a retest of the low, or a sell-swing down toward the 200 day SMA.

We’re now seeing that logical sell-swing action (beneath $70) in motion, though it seems to have required a huge international incident to set shares tumbling lower on this bearish pathway.

Continue following this stock and learn the lessons from this example (Bull Trap/Reversal, News/Reaction, etc).

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Corey Rosenbloom, CMT

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