Lumentum Holdings Inc. (NASDAQ:LITE) is trading higher on Tuesday. It may be on the verge of a breakout.
• Lumentum Holdings stock is among today’s top performers.
But sometimes when a stock appears to have broken out, it reverses rapidly and gives back all of its gains. Traders call this a bull trap and they are looking to see if there is one in Lumentum. This is why it is the Stock of the Day.
Many times when a stock reaches a resistance level, it reverses and heads lower. This happens when some of the traders and investors who created the resistance with their sell orders become anxious and impatient.
They decide to reduce their offer prices to attract buyers. Other impatient and anxious sellers see this and do the same thing. It could result in a snowball effect that forces the shares into a downtrend.
Sometimes at resistance levels, buyers eventually overpower sellers and push the price higher. This is called a breakout.
Breakouts can be a bullish dynamic for a stock. It shows that the sellers who created the resistance have either finished or canceled their orders.
With these sellers gone, buyers will be forced to outbid each other if they wish to purchase shares. This can force the stock into an uptrend.
But sometimes it appears a stock may be breaking out, but it reverses and gives back all its gains. This is called a bull trap, or a false breakout.
These occur when sellers decide to step out of the market for a short period of time. They think that if they do so, the price will go higher and they can sell at a better price.
But when they come back into the market and start selling again, it can push the shares lower. This creates the bull trap.
The traps tend to be followed by downtrend. If Lumentum Holdings can't breakout, it may go lower.
Courtesy: Piotr Swat on Shutterstock
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