Chartered Market Technician (CMT) Practice Exam

A bear trap is defined as a market scenario where prices drop below a significant support level, leading traders to believe a bearish trend is in motion. This situation often triggers sell signals, causing traders to enter short positions, expecting prices to fall further. However, a true bear trap occurs when the prices quickly recoup or "recapture" that violated support level, invalidating the initial sell signals and potentially leading to a rapid price increase. This phenomenon can mislead traders, resulting in losses for those who have shorted the market based on the initial price drop.

The other definitions do not accurately capture the essence of a bear trap. When prices drop below a resistance level, it does not reflect the reversal aspect inherent in a bear trap. Similarly, breaking through an established trend line describes a change in trend direction but lacks the specific characteristics of a bear trap. Lastly, consolidation at a support level indicates price stability rather than the deceptive reversal that defines a bear trap. Thus, the choice that highlights the recapture of a violated support level after sell signals are generated truly encapsulates the concept of a bear trap in market terminology.