Bitcoin Faces Important Technical Test
Over the weekend, Donald Trump declared the creation of a U.S. strategic crypto reserve, which will include Bitcoin and four other cryptocurrencies. The price immediately responded with a substantial rally over the weekend, but, by the close of business on Monday, had given up all of those gains. That immediately got my attention, because a market that does not respond to what is perceived as good news is usually vulnerable.
In this respect, Chart 1 indicates that the price broke down from a four-month head-and-shoulders top, rallied back above the breakdown point, and is now back below it. It's the manner of that false break that gets my attention, because Sunday and Monday's action took the form of a bearish two-bar reversal.
A Bearish Two Bar Reversal
These patterns develop after a rally. The first bar opens near its low and ends close to its high. Consequently, buyers are very much in control at the end of its formation. The second one is completely different. Here, the price opens near the close of the first bar, but ends way down near the first bar's opening price. At the end of the second bar, it is the sellers who now dominate. Virtually all who bought during the two days are going home with a loss, clearly placing downside pressure on the price.
Two bar reversals get their significance from several factors.
- The size of the rally that precedes it. In this instance, it was two days. That's not very long, so we place a low score on that one.
- The greater the volume, the larger the battle between buyers and sellers and, therefore, the greater the pattern's significance. I would give that one an average rating, as volume did not stand out in either direction.
- The wider the bars, the greater their significance. In this case, we see two very wide bars reflecting a huge battle between buyers and sellers with a 10% spread. To me, that's significant.
- Finally, if the pattern develops around the point of a breakout and does not hold above it, the implication is the whole move was a whipsaw. False moves such as this are typically followed by an above-average move in the opposite direction to the breakout. In this instance, the false move took the price temporarily above the red breakdown line, but it was unable to hold.
People can and do change their minds, which also applies to markets, so we can never rule out the possibility the two-bar reversal will be cancelled with a break above the 50-day MA and green down trendline, but I think it's unlikely.
The Longer-Term Picture
Regardless, the price has reached a very crucial point on the longer-term charts. In that respect, Chart 2 shows us that the price is resting on its 2023-2025 up trendline and has slightly violated the up trendline for the Special K, which you can read about here. It is evident that previous trendline violations were followed by substantial trend reversals in the price.
Chart 3 displays the same indicator. This time, though, the green shading tells us that when the Special K is above its signal line, the price typically advances. The most bearish periods develop when it is below it. Note the price is also right at its 200-day MA and signal line, further underpinning the crucial technical juncture point that the price has now reached.
Finally, Chart 4 takes an even longer view with a price history going back to 2015. There are two things worth noting. First, the PPO has tentatively crossed below its MA, thereby ending the bullish-shaded period. (I say tentatively because the break is not yet that decisive and could change by the end of the month.) The second point is that the whole action since late last year could represent a false upside breakout from the 2021-2024 consolidation inverse head-and-shoulders. That hasn't happened yet, but is certainly worth close monitoring.
In conclusion, Bitcoin has broken down from an intermediate top, which suggests lower prices. What is disturbing is that many of the long-term indicators are precariously balanced, so that any near-term weakness is likely to tip them over into the bearish camp. Dominos, anyone?
Good luck and good charting,
Martin J. Pring
