BTC's Downward Breakout May Trap Bears
Updated
Chart 1: BTCUSD's Downward Breakout From Bear-Flag Channel
(Chart 1 also includes a hypothetical price path showing one probable way that price could retest the channel and the downward trendline that has held as resistance since November 2021.
BTC's Downward Breakout from Parallel Channel/b]
On August 19, 2022, BTC fell over -10%, breaking out below its upward sloping bear-flag channel. This parallel channel has contained price since the June 18, 2022, low at $17,592. The breakout below the channel was also decisive with a taller bearish candle that closed very near the low for the day.
As price has continued to rally, volume has dwindled. This represents lack of conviction in the rally when volume does not support each subsequent push higher.
Potential Retest of the Parallel Channel
In weighing the likelihood of a potential retest of the parallel channel that has defined this bear rally, consider the following points:
1. No one can say with certainty whether the bear rally is finished or whether the downtrend is complete. However, the bear rally may not be complete, and bears opening shorts on this breakout may be trapped in the coming days / weeks. Bull and bear traps have been a common occurrence in this bear market. Note that this is a short-term view only—the longer-term price action and trend structure remain quite bearish, and this author does not advocate a long investment strategy at this time in BTC.
2. Even though the macroeconomic environment remains poor with sticky inflation and tightening financial policy likely to continue in the intermediate term or long term, corrective rallies can push higher and longer than most expect. Markets can remain irrational longer than traders can remain solvent. Market research studies have shown that some of the strongest, sharpest rallies in equity markets have occurred during prolonged bear markets. Look no further than the recent rally: the macroeconomic picture has remained relatively unchanged, but equity indices and cryptocurrencies have rallied significantly in the past two months.
3. While the bear rally may constitute an upward correction within the downtrend, consider that the recent decline on August 19, 2022, may simply constitute a correction within a correction. Stated differently, today's decline may represent a retracement within an ongoing bear rally that has already pushed over 40% higher from June 2022 lows. And the ongoing bear rally is itself a larger-degree retracement within a ten-month downtrend.
4. Breakouts above / below trendlines or channels commonly lead to short-term reversals that (at a minimum) retest the breakout point. In this case, a retest of the channel would lead price to the $23,000 to $24,000 range. Like every common price pattern, whipsaws involving retests of breakout points do not always occur.
5. Currently, price has declined to just above the .618 retracement of its entire rally off the June 2022 low near $17,592. This .618 retracement level frequently holds as initial support or resistance when price corrects a recent price move. The zone between the .618 retracement and the .786 retracement should be watched carefully over the coming week. If it holds firmly as support, this could indicate that the decline is part of a correction within an ongoing larger bear rally off June 2022 lows. (Note that the .618 retracement can be important both during corrective rallies within uptrends and corrective bounces within downtrends.)
Supplementary Chart: BTC's Recent Decline May Pause or Reverse at the Zone between the .618 and .786 Retracement Levels
Potential Test of the Ten-Month Down Trendline
Corrective price patterns frequently work havoc on bears and bulls who want to see consistent trendlike price action in one direction or the other. Note that corrective patterns can be upward, as in the current bear rally within BTC's downtrend, or they can be downward, as the In the short term, price has chopped back and forth within the corrective parallel channel shown in Chart 1.
Further, corrections can unfold in complex combinations as Elliott Wave theory teaches. For BTC, the current bear rally is an upward correction. This upward correction And a two-month bear rally could be the first segment of a complex correction—alternatively, it could be the end of the corrective retracement.
The primary chart, Chart 1, shows in blue the major down trendline that has defined this downtrend in BTCUSD. This down trendline has contained price since early November 2021 may still be tagged in the coming days or weeks.
Important levels of support or resistance tend to act as a magnet for price when price approaches them. The retest of the parallel channel could in theory coincide with a test of the down trendline in early September 2022. If this happened, the test would occur at a price of approximately $23,500 to $24,000.
Finally, while many have concluded the final lows were made and others see this as a bear rally, this bear rally still constitutes an upward correction within a downtrend until the weight of the evidence proves otherwise. So this article posits that price could continue the upward correction (retracement) higher or sideways over the next few weeks, and that today's decline might be a downward correction within the corrective bear rally. And any rally may trap bulls with another sharp move lower. After all, markets in equities and crypto have continued to confound bears and bulls alike leaving market makers with bulging pockets full of profits.
NOTE: This article is intended to present a relatively objective view of BTC's current price action and key levels using technical analysis. The author has no open position at the time of publication (August 19-20, 2022) on BTCUSD or BTC-related investment products such as BTC futures , BTC ETFs (BITO) or BTC derivatives.
DISCLAIMER: This post is published solely for educational / entertainment purposes and does not constitute financial advice or an investment recommendation and cannot account for any person's particular financial circumstances. The author would not want other investors / traders to lose money by relying *solely* on this idea rather than doing their own due diligence. Before entering any trade, please evaluate the risks of (i) the instrument / security being traded, (ii) the type of trade and its timeframe, (iii) risks inherent in that type of trade and its time frame, (iv) the inherent risks of shorting securities (presenting unlimited risk without hard stops in place), (v) the inherent risks of trading options, leveraged ETFs, and cryptocurrencies, and (vi) all financial risks arising each person's personal financial circumstances.
CME:BTC1!
BITSTAMP:BTCUSD
COINBASE:BTCUSD
BINANCE:BTCUSDT
FTX:BITOUSD
SP:SPX OANDA:SPX500USD VANTAGE:SP500
(Chart 1 also includes a hypothetical price path showing one probable way that price could retest the channel and the downward trendline that has held as resistance since November 2021.
BTC's Downward Breakout from Parallel Channel/b]
On August 19, 2022, BTC fell over -10%, breaking out below its upward sloping bear-flag channel. This parallel channel has contained price since the June 18, 2022, low at $17,592. The breakout below the channel was also decisive with a taller bearish candle that closed very near the low for the day.
As price has continued to rally, volume has dwindled. This represents lack of conviction in the rally when volume does not support each subsequent push higher.
Potential Retest of the Parallel Channel
In weighing the likelihood of a potential retest of the parallel channel that has defined this bear rally, consider the following points:
1. No one can say with certainty whether the bear rally is finished or whether the downtrend is complete. However, the bear rally may not be complete, and bears opening shorts on this breakout may be trapped in the coming days / weeks. Bull and bear traps have been a common occurrence in this bear market. Note that this is a short-term view only—the longer-term price action and trend structure remain quite bearish, and this author does not advocate a long investment strategy at this time in BTC.
2. Even though the macroeconomic environment remains poor with sticky inflation and tightening financial policy likely to continue in the intermediate term or long term, corrective rallies can push higher and longer than most expect. Markets can remain irrational longer than traders can remain solvent. Market research studies have shown that some of the strongest, sharpest rallies in equity markets have occurred during prolonged bear markets. Look no further than the recent rally: the macroeconomic picture has remained relatively unchanged, but equity indices and cryptocurrencies have rallied significantly in the past two months.
3. While the bear rally may constitute an upward correction within the downtrend, consider that the recent decline on August 19, 2022, may simply constitute a correction within a correction. Stated differently, today's decline may represent a retracement within an ongoing bear rally that has already pushed over 40% higher from June 2022 lows. And the ongoing bear rally is itself a larger-degree retracement within a ten-month downtrend.
4. Breakouts above / below trendlines or channels commonly lead to short-term reversals that (at a minimum) retest the breakout point. In this case, a retest of the channel would lead price to the $23,000 to $24,000 range. Like every common price pattern, whipsaws involving retests of breakout points do not always occur.
5. Currently, price has declined to just above the .618 retracement of its entire rally off the June 2022 low near $17,592. This .618 retracement level frequently holds as initial support or resistance when price corrects a recent price move. The zone between the .618 retracement and the .786 retracement should be watched carefully over the coming week. If it holds firmly as support, this could indicate that the decline is part of a correction within an ongoing larger bear rally off June 2022 lows. (Note that the .618 retracement can be important both during corrective rallies within uptrends and corrective bounces within downtrends.)
Supplementary Chart: BTC's Recent Decline May Pause or Reverse at the Zone between the .618 and .786 Retracement Levels
Potential Test of the Ten-Month Down Trendline
Corrective price patterns frequently work havoc on bears and bulls who want to see consistent trendlike price action in one direction or the other. Note that corrective patterns can be upward, as in the current bear rally within BTC's downtrend, or they can be downward, as the In the short term, price has chopped back and forth within the corrective parallel channel shown in Chart 1.
Further, corrections can unfold in complex combinations as Elliott Wave theory teaches. For BTC, the current bear rally is an upward correction. This upward correction And a two-month bear rally could be the first segment of a complex correction—alternatively, it could be the end of the corrective retracement.
The primary chart, Chart 1, shows in blue the major down trendline that has defined this downtrend in BTCUSD. This down trendline has contained price since early November 2021 may still be tagged in the coming days or weeks.
Important levels of support or resistance tend to act as a magnet for price when price approaches them. The retest of the parallel channel could in theory coincide with a test of the down trendline in early September 2022. If this happened, the test would occur at a price of approximately $23,500 to $24,000.
Finally, while many have concluded the final lows were made and others see this as a bear rally, this bear rally still constitutes an upward correction within a downtrend until the weight of the evidence proves otherwise. So this article posits that price could continue the upward correction (retracement) higher or sideways over the next few weeks, and that today's decline might be a downward correction within the corrective bear rally. And any rally may trap bulls with another sharp move lower. After all, markets in equities and crypto have continued to confound bears and bulls alike leaving market makers with bulging pockets full of profits.
NOTE: This article is intended to present a relatively objective view of BTC's current price action and key levels using technical analysis. The author has no open position at the time of publication (August 19-20, 2022) on BTCUSD or BTC-related investment products such as BTC futures , BTC ETFs (BITO) or BTC derivatives.
DISCLAIMER: This post is published solely for educational / entertainment purposes and does not constitute financial advice or an investment recommendation and cannot account for any person's particular financial circumstances. The author would not want other investors / traders to lose money by relying *solely* on this idea rather than doing their own due diligence. Before entering any trade, please evaluate the risks of (i) the instrument / security being traded, (ii) the type of trade and its timeframe, (iii) risks inherent in that type of trade and its time frame, (iv) the inherent risks of shorting securities (presenting unlimited risk without hard stops in place), (v) the inherent risks of trading options, leveraged ETFs, and cryptocurrencies, and (vi) all financial risks arising each person's personal financial circumstances.
CME:BTC1!
BITSTAMP:BTCUSD
COINBASE:BTCUSD
BINANCE:BTCUSDT
FTX:BITOUSD
SP:SPX OANDA:SPX500USD VANTAGE:SP500
Note
Another supplemental chart: Consider that the .618 retracement of BTC's entire price range ($2.22 to $69,000) lies near $26,000. It seems possible that this key level could be another factor to draw the bear rally higher for longer before the downtrend resumes. Note
Correction (see word in bold): "Note that the . 618 retracement can be important both during corrective pullbacks within uptrends and corrective bounces within downtrends."Note
As discussed, the bear rally is a correction within a well-established downtrend. If the current decline is a smaller correction within the bear rally, i.e., if the bear rally is going to continue, price support must hold at the .618 retracement, the .786 retracement, or the blue support line shown in the chart below. It seems that price may want to make another decline this coming week, so it will be interesting to see if / where price reverses.If price does not find support at any of these levels, then a new low is likely.
Note
The bounce from BTC's August 19 low looks corrective over the past several days. This suggests a more downside. Next levels to watch as targets are as follows:1. .618 retracement of the rally off June 2022 lows as discussed in the above post at 20,521.12
2. .786 retracement of the rally off June 2022 lows as discussed above at 19,223.29.
If these levels cannot hold, then the next target would be the low from June 2022 at 17,592.78
Note
In my last update August 22, I noted that the bounce from BTC's August 19 low looked corrective, which implied that more downside may unfold before price could bounce again. Intermediate-term support levels to watch again are as follows:
1. .618 retracement of the rally off June 2022 lows as discussed in the above post at 20,521.12
2. .786 retracement of the rally off June 2022 lows as discussed above at 19,223.29.
If these levels cannot hold, then the next target would be the low from June 2022 at 17,592.78
Price did bounce since this post was published on August 19. However, price never reached the supports discussed in my original article, which are the levels just identified in this update.
Once price reaches the .618 / .786 retracement zone, it will be important to evaluate whether price is repelled higher to determine whether an ultimate backtest of the parallel channel will occur (around 23.5) or the downward trendline (24.5 the next week or so).
Trade closed: target reached
The central point of this post was that bears may be trapped expecting a straight decline to new lows. The post noted that the .618 to .786 retracement levels may be where price reverses and traps bears. This happened and has largely played out—price reversed right around the .786 retracement -- just a bit below. This post also argued that BTC would likely test both (i) the 10-month downtrend line and (ii) the lower trendline of the parallel channel that defined the bear rally from June lows to August highs. The specific argument was as follows: "The primary chart, Chart 1, shows in blue the major down trendline that has defined this downtrend in BTCUSD . This down trendline has contained price since early November 2021 may still be tagged in the coming days or weeks.
Important levels of support or resistance tend to act as a magnet for price when price approaches them. The retest of the parallel channel could in theory coincide with a test of the down trendline in early September 2022."
This has partially worked out. Today, September 12, price has come within 1.22% of retesting the 10-month downtrend line at about $22,500 - $22,750 (b/c the line slopes downward, the price level for the line decreases as each day passes). If price holds at current levels, it will test the trendline within a day or two.
It does not look like the parallel channel will be retested though.
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