MARKETS SPECTATOR: Avoiding the bull trap

With stocks rallying to all time highs, how can investors tell if markets a truly on a bull run or just a temporary surge? Here's how to watch for a 'bull' trap.

One way to avoid being sucked into a false breakout or ‘bull trap’ is to wait for the market to consolidate after the breakout point. When it moves higher following this consolidation, it’s reasonably safe to assume that the breakout has been successful and the market is likely to move higher.

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The chart above shows the Australian market breaking out to all-time highs in 2004. It then had a brief consolidation period before breaking upwards again. Buying on the second breakout is a much safer way to enter the market following a breakout.

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