Technical Analysis: CW #29 – Bull Trap or Trend Reversal? How to trade

The last week was positive for everyone who is still bullish on Bitcoin after more than six months of bearish price action. However, many traders remain sceptical.  According to them, the recent rally is insignificant and looks more like a bull trap or even a pump and dump scheme. Both of these bearish camps see sellers taking control again soon and expect the price to fall beneath the ~6000 resistance level. We are going to argue here that this case is not likely and that shorters are missing out on major indicators.

General assessment of the market

The resistance level that we recently tested held for the third time in a 6-month time frame. A few weeks ago, we saw the price falling significantly below that resistance. But the price recovered quickly which is a good and strong signal for a bullish case. In addition to that, Bitcoin was moving underneath both the 200-MA and the 100-MA for several weeks, a pattern that we haven’t seen since the last bull run. It’s very likely that we will see another correction before prices start to take off again. But there are more indicators that suggest that the Bitcoin price is in the buyer’s control again.

RSI indicates more substance behind price action

RSI-values above 70 suggest that prices are overbought and that they are going to fall again. However, this did not happen with the Bitcoin-chart this week. The RSI moved into the overbought zone, stayed there for a significantly longer time than normal and, of course, it fell again. But the prices did not fall with the RSI. At least not in the Bitcoin chart. This “bleeding of the Altcoins” is a proof for many people that sellers are really in control of the market. Or even that whales are deliberately manipulating the markets to trade Altcoins from weak hands for Bitcoins and to let the Bitcoin price fall later. But we have to keep in mind that “smart money” is trading in Bitcoin and less so in Altcoins. Hence, Bitcoin is moving much more predictable within the terms of technical analysis.

The price stayed in the heavily overbought zone for about two days and did not go anywhere near the oversold zone as of now. This indicates that the recent rally,  although small, was substantial.

Short squeeze is likely the cause to sudden price rise

Since we have been in a bear market now for more than six months, short positions are still outweighing long positions. Many traders professional and unprofessional are betting on Bitcoin to fall further. The recent rally caught these traders by surprise and it meant a loss for them and potentially even higher losses in the future. This is why shorters bought Bitcoin to mitigate losses which forced the prices to rise even higher. To many observers, this might have looked like the initial phase of a  pump and dump scheme. But given short speculation is still more common, a short squeeze is the better explanation.

Fibonacci levels – another bullish case

Bitcoin is currently trading around the 0.382 Fib level. If we set the ATH as the absolute ATH of Bitcoin, we are even underneath the 0.236 level. Another indicator that makes it more likely that prices will go up in the near future. The potential for a future increase of the price is much higher than a decrease. In any case, if prices continue to fall, they will likely not fall much deeper than our current level.

How to trade this week

The price activity over the weekend is unreliable due to bot activity and the lack of trader activity. So the beginning of this week should settle the price movement from here on. A small correction seems likely as the RSI has been close to the overbought zone for almost a week now. It is unlikely that prices fall as deep as the recent lows and even more unlikely that we lose our resistance underneath $6000 USD. But as it is possible set reasonable stop/losses underneath the resistance as a breaking resistance would mean a continuation of the bear market. The much more likely scenario seems to be a correction to $7000- 7200USD. This could be a good entry range. From there on Bitcoin could aim for the next Fib level 0.5 at about $7830 and $8350 USD.


Hope you trade successfully and of course DYOR.