So-called “bull traps” often frustrate traders, as they did on Wednesday, snaring shares of SIGA Technologies ( SIGA ) Inc — and there may be another one today.

That's why it’s our ‘Stock of the Day'.

SIGA ( SIGA ) shares have been very active because of a surge in Mpox (The World Health Organization ceased using the term Monkey Pox in November 2022 to reduce the stigma and association with monkeys).

SIGA ( SIGA ) produces treatments for this disease. The New York-based company released disappointing trial data for a drug to treat Mpox on Thursday, Aug. 15, causing the stock to fall almost 20%. However, it jumped more than 15% early Friday.

Read Also: Emergent Biosolutions, Bavarian Nordic, GeoVax And SIGA Technologies Shares Are Making Big Moves Thursday

What Is A Bull Trap? A bull trap is akin to a false breakout.  It looks like a stock is going to break out and keep moving higher. But the sellers quickly overpowered the buyers and pushed the stock back below the resistance.

Resistance is a large group of traders and investors who are trying to sell shares close to the same price. As you can see on the chart, there has been resistance for SIGA ( SIGA ) around $10.50.

Sometimes when a stock reaches resistance it reverses and heads lower. This happened with SIGA ( SIGA ) in late July and early May.

This occurs when some of the people who created the resistance with their sell orders become concerned that other sellers will undercut them. They know that the buyers will go to whoever is willing to sell at the lowest price.

So, they reduce the prices they are willing to sell at. Other concerned sellers see this and do the same. It results in a snowball effect that pushes the price lower.

But sometimes the stock ‘breaks out' and moves above the resistance.

Breakouts can signal a bullish dynamic. It could mean that the traders and investors who created the resistance with their sell orders have either finished or canceled.

This means a large amount of the supply of shares is gone. If buyers enter the market, they will have a difficult time finding people to sell shares to them.

As a result, they will need to increase the prices they are willing to pay or the sellers won't be interested. This price action could force the shares into a new uptrend.

Sometimes the shares trade above the resistance and it looks like it's a breakout. But it's a ‘head fake'. The sellers have just been on the sidelines.

They come back into the market, overpower the buyers, and push the price lower. This is the ‘false breakout' or ‘bull trap'.

But savvy traders can often profit from these dynamics by going from long to short.  Bull traps can be a good contrarian signal.

They tend to be followed by meaningful moves lower. SIGA ( SIGA ) may be about to enter a downtrend.

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