BTC's Downward Breakout May Trap BearsChart 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.
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