Bitcoin sell vacuum test of major support

Market Overview: Bitcoin Futures

Bitcoin sell vacuum test within a Bear Channel, down 70% from all-time highs and currently testing a major support: the previous Breakout Point, which happens to be the previous all-time high. Last week, a Low 2 sell signal bar triggered; so far, this week responded with a Lower Low. However, there are signs of trend exhaustion detected: the trend may end soon. But even if the bear trend ends here, there is an 80% chance that the price will not break above $33000 for several months.

Bitcoin Futures

The Weekly chart of Bitcoin Futures

Context

• Price is having a gigantic fall since the all-time highs. Now is near the low of a 70% correction. Since the beginning of Bitcoin Spot Trading, massive corrections are common.
• This would be the second major correction since the launch of the Bitcoin Futures on Chicago Mercantile Exchange (CME). The first major downtrend ended after an 85% correction. If current price continues to fall until an 85% correction, we will trade at $10400.
• Since the price is above 09/07/2020 Higher Low Major Trend Reversal, this could just be a pullback of a higher timeframe bull trend.
• After a strong Spike & Channel bull trend between 2020 and 2021, the price transitioned into a Trading Range. We could call it also an Expanding Triangle, which is just a type of Trading Range.
• Presently, we are developing a second bear leg in a Trading Range.
• From the high of the first leg to the high of the second leg, we can draw a bear trend line, representing a Bear Channel. Bear Channels break to the upside 70% of the time.
• During the Bear Channel, important gaps were closed, warning traders that this channel is contained within a Trading Range. However, there is a gap open, happening at an advanced stage of the channel, between the 01/24 low and 31/05 high.
• If we measure the first bear leg between 11/08/2021 high and 01/24 low, and we consider that the second leg starts on 03/23 high, this measure would project a second bear leg to $12000.

Can bears get there?

• We are in a Bear Channel: the price is creating lower lows and lower highs, and therefore, it won’t be surprising if we continue on the direction of the trend.
• However, between the second bear leg projection and the current price, there are significant supports which, consequently, could stop the fall.
• The most emblematic price level of this chart it is possibly the prior all-time high, which is also the exact price of the open of the Bitcoin Futures when they launched.
• Another influential support could be the 200-week moving average. This is the first test of this moving average since Bitcoin Futures are trading.
• Lastly, there is the price of 2017’s close, that became a strong resistance. After 2020 bull trend, it is now a support: Breakout Point.
• While the price is in a Trading Range, 80% of attempts to break up or down will fail. We do not know when or where there is the exact top or bottom of the range until there is a successful breakout. What we do know is that traders will try to Buy Low & Sell High.
• Signs of Bear Trend exhaustion:
  • The only gap that remains open happened at an advanced stage of the trend, between 01/24 low and 05/31 high.
  • We consider a trend sustainable when gaps are at the beginning or at an intermediate stage of the trend, not later.
  • This enforces the idea that this second bear leg it is just a vacuum test of support and, therefore, a bear trap.
• There is a Nested Wedge Bottom:
  • Between 09/20/2021, 01/24, 05/09 lows.
  • Between 01/24 or 02/22 and 05/09, 06/13 lows.
  • And a parabolic one between 04/11, 05/09, 06/13 lows.
• Price just arrived at a Measured Move target based upon the prior bear flag: between 03/28 high and 02/22 low. If the price continues to fall, there is another projection that can be made from the bear flag: between 03/28 high and 01/24 low; this projects the price to $17000.
• Moreover, as we can see, one of the biggest bear bars of the trend was this last one weekly bar. When this happens at an advanced stage of the trend, could attract profit taking from the bears.
• Finally, we should add that we are far from the 20 periods exponential moving average (EMA 20). We consider this moving average as an indicator of a fair price. It is hard to sell this far.

Bullish potential

• After 05/31 attempted to close the gap between its high and 01/24 low. It failed. More important, price created a new lower low in the bear trend. That may imply that 01/24 low is a critical price because probably there are strong bulls trapped into longs. ¿What would they do when price revisits their wrong entry? They will sell, believably.
• While odds may favor a bounce soon, another problem for the bulls is that this current bear leg has been strong enough to expect another leg sideways to down.
• Bulls foresee a future with the price testing the 2021 close. This price, it is also around the middle of the Trading Range, and therefore it is an essential price level that could be considered as a price Magnet. For now, we are far from that scenario.
• Most likely, the best bulls can get during the next several months is a Trading Range between the final second bear leg low and $33000. That is a Trading Range embedded into a Trading Range.
• There are different types of Trading Ranges:
  • Rectangular, Triangles, Expanding Triangles and Head and Shoulders.
• Presumably, the Bitcoin price will draw one of those type of Trading Ranges during the next following months between the final second bear leg low and $33000.

What to expect next few weeks

• The last weekly bar has been a big bear bar, closing near its low, right at a major support.
• There is not a big tail below the bar, and hence, we do not see symptoms of bears taking profits.
• All bulls have is just a tentative. They know that big bear bars late in a trend may attract profit taking.
• We are in a parabolic bear move, it won’t be surprising if the price continues to fall from here. When something it is not going to surprise us, we assign, at a minimum, a 40% chance of that happening. That means, there is a 40% chance at least that the price could reach the next support, at around $14000.
• Theoretically, what would not be a surprise is a retracement from here. ¿Do we have then a 60% chance of a retracement from here? Without trace of bears taking profits, we must doubt.
• Doubt, hesitation or confusion, induces Trading Range price action.
• As we are at major support, hesitation slightly favor the bulls, but next week can disappoint both bulls and bears.

The Daily chart of Bitcoin Futures

Context

• Price is in a strong bear trend, contained into a Bear Channel.
• The trend has been strong because maintains open gaps around the beginning and middle stages of the trend (gap 1 and gap 2 in the chart).
• However, the price just reached a major support. This could mean the end of the trend.
• Nevertheless, the price keeps a third gap (gap 3) open, which happened late in the trend. While this gap is open, bears still have chances of continuing down.
• At current prices, it is hard to believe that strong bears will sell. Most likely, they will first “test the waters”, that means, testing gap 3.
• If gap 3 does not close after the test, there will probably be more downside to come. In this scenario, bears foresee a Wedge Bottom between 05/12, 06/15 lows and a hypothetical one at around $14000.
• If gap 3 closes, bulls and bears will look ways to buy. That means, the bottom of a future Trading Range is forming.
• During the whole Bear Channel, there was not any complete bar above the 20 EMA. When that happens, it will probably tempt traders ready to sell.

Gaps are always the key

• We mentioned that the bear trend has been sustainable because it keeps important gaps open. Those gaps are:
  • Gap 1: Between 04/01 low and 04/21 high.
  • Gap 2: Between 01/24 low and 05/31 high.
• We might consider 04/26 or 27th low and 05/31 high; However, as 05/31 is far from that low, it might be a better reference 01/24 low.
• Normally, a third gap it is not considered sustainable because it happens, by definition, at a later stage of a trend. A third gap normally represents exhaustion.
• It is also true that until gaps do not close, even if there are three or more, it means that the price continues to behave like a trend, and therefore continues to go in the direction of the tendency.
• In general, a second gap in a bear trend represent strong bears selling. This is because they know that they are at a sweet spot where strong bulls must react in different ways. For example:
  • Strong bulls may sell prior longs because they understand that their premise is not valid anymore and will assume a loss.
  • Strong bulls may not sell, but neither buy. They will buy lower and scale in their position: They will own trapped longs at that price level.
• Many may have done this. They know that on higher timeframes we are likely in a Trading Range, and therefore they are confident that they will avoid a loss if they manage their trade correctly (scale in lower).
• Following this reasoning:
  • Bulls that bought at gap 1 can avoid a loss if they scaled in at gap 2 and more around current prices, if price comes back to gap 2.
  • They make money on their third entry, breakeven on their second entry, and loss on their first entry. Result is Breakeven.
  • Bulls that bought at gap 2 can make money if they scaled in around current prices.
  • They make money on their last entry and breakeven on their first entry. The result is that they make money.

What is the important take here?

• That bulls will probably sell at gap 2.
• Bears know that and will also look to sell around gap 2.
• This is the exact behavior that normally happens around Trading Range tops: both bulls and bears look to sell.
• 80% attempts to break out any side of a Trading Range fail.
• There is an 80% chance that Bitcoin will stay below gap 2, at around $33000 during several months.

What to expect over the next few days

• Last Monday was a strong bear Breakout bar.
• Tuesday was a bad follow through bar, a bear bar closing above its midpoint. Disappointing for the bears.
• Wednesday was a bull doji. Disappointing for the bears.
• Thursday was a Low 1 entry setup.
• Friday was a bad follow through bar, a bear doji closing above Low 1 low. Disappointing for the bears.
• If after good bear setups, then comes bad follow through, this may frustrate bears, make them hesitate.
• Good setups and bad follow through is a more typical behavior of Trading Range than trends. That is why we should expect reversions. We should expect a pullback.
• What could be a surprise, is a successful bear breakout: Bear Channels only break on the downside 30% of the time. Consequently, there is a 70% chance of breaking this tight bear leg to the upside.
• But reality is that bulls have not achieved anything yet, therefore, they are also hesitating.
• Hesitation, doubt, confusion, induce Trading Range price action.
• In this particular case, hesitation favor clearly the bulls because price sits at a major support.
• We should expect a pullback starting this next week.

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