Bitcoin Trading Reversals 2018: Lessons to be Learned

Bitcoin day traders are seeking a light at the end of the tunnel. Our fall from grace since almost reaching $20,000 is demotivating to say the least. Capitulating sub-$10,000 and then even going below $6,000 has made many newcomers lose confidence.

That said, you might know the following saying: “Be fearful when others are fearless and fearless when others are fearful.” We know the meaning isn’t to take gambles… Be calculated, but look for low risk-to-reward opportunities.

Don’t be afraid to buy when there’s “blood in the street”.

Don’t sell out on the belief that Bitcoin is a legitimate investment just because the market sentiment is poor right now. Billions of dollars are invested in this sector, everyone’s time and money is at stake and the technology itself proves stronger every day.

Bitcoin Downtrend Meets Major Correction?

Before we speculate, educate yourself on what really moves markets.

Many crypto traders are using leverage which means the more people that trade crypto, the larger the “manipulation” appears. While big players and market makers, hackers, hedge fund managers and a select number of rich Bitcoin holders (like Roger Ver and Jihan Wu) can immensely suppress Bitcoin’s price — in reality, it’s much more likely the market itself is causing such volatility.

Imagine 1,000 traders two years ago were holding Bitcoin short positions. Fast-forward to now and 100,000 traders are using leverage to trade the downtrend. As the market scales and a greater number of people go short (due to market sentiment / technical analysis), what else happens?

We get primed for a short squeeze which is what happens when shorts get liquidated. A cascading effect occurs. As an example — we have long-term resistance at $10,000 and many traders will put stops just above this price. If we have a breakout those stops create more buying pressure and help buy up the price. As this happens, more shorts get liquidated.

Example of Bitcoin short squeeze in chart

Bitcoin short squeeze: Large upward candle results in liquidation for shorts.

Such moves normally coincide with an exhausted bear market. We see this happen when the bottom is decided, particularly after sell volume completely dies off. The downward pressure results in a sudden spike upward which triggers more liquidations.

As the breakout happens at a resistance we already predict a spike anyway, which is simply more fuel for the sudden rise. A good example of such a scenario can be found on July 15th and 16th when Bitcoin went from $6,350 to $7,500 over those two days. We saw a similar move play out on February 5th and 6th as Bitcoin rose from a $6,000 bottom to a $8,500 peak in two days time.

Bitmex is now the leading leverage-based Bitcoin exchange platform. Their volume in the month of August 2018 has been extraordinary, $5.5 billion in the past 24 hours alone. A catastrophic price move is very possible if a squeeze happens in either direction — especially with such high volume and so many open contracts.

If we get short squeezed, liquidations could send the price flying from $6,000 to $10,000 to $14,000 virtually overnight. This reversal puts bigger targets in trajectory and drastically increases the odds of a new ATH soon. Big gains for smart traders!


The Recent Price Movements of Bitcoin

Crypto was going to go for a big boom or bust last year. So much hype lead up to the run-up to $5,000 and complete dread hit soon after with the China ban news. Even so, the market found a price floor at $3,000 and swiftly moved up 600% after pushing for new highs.

2016 to 2017 Bitcoin price chart from tradingview

The all-time high was hit in December. Every peak must be matched with a substantial price drop, all markets are like this … but it’s the trader’s job to figure out when / if the price bounces and continues with more upward momentum thereafter.

Let’s zoom in on the chart posted above for a moment …

Bitcoin price chart February to August 2017

Bitcoin’s price is currently moving out of a major lull after a failed rebound in prior months. The previous bottom (since the all-time high in December) was established around $6,000 in February.  

What we see here is a failure to create another leg down in the bearish downtrend. We broke out of the channel and are now testing a much higher price range. The price dropped to the $5,700 area but subsequently rose to well over $8,000 after July’s rebound took into effect.

One very big play can be seen here. The Weekly chart is forming a cup & handle. To complete, the price of Bitcoin must continue to rise to $10,000 before forming the handle. A break above will signal a complete bullish reversal which will quickly put us in a position to challenge the mid $10,000’s and, subsequently, the December all-time-high.

1 weekly Bitcoin price chart

As you can see in the above image, we are in the breakout moment of the reversal attempt.

What we will see next will be a successful breakthrough, a rejection or an overthrow (strong rejection). We’re desperately eying the $10,000 area as that’s a juicy cup & handle pivot point.

A successful breakthrough will require another week of trading with prices above $8,000 and trending higher. A rejection could happen at any point now. An overthrow could rise further over the next week and then plummet down and potentially bring us back to the territory of $6,000 and lower.

By the way, this chart shows a textbook cup & handle formation. The rule is that it takes a minimum of seven weeks for the cup to form. After the seventh candle, the eighth week was a bearish hammer but the price still went up. This fact strongly suggests that we’re looking to complete the cup and form the handle.

From Investopedia:

Information on trading the cup and handle pattern from Investopedia

We cannot always predict where the price will go. However, we can play the trend and capitalize on any movements that happen. We know momentum will pick up sooner or later and send us flying in one direction. Since there’s no much to gain from being right, sniping the most rewardable positions is key.

Check our technical analysis guide for Bitcoin trading for Bitcoin day trading to learn more about common price patterns, indicators and much more.


How to Trade Bitcoin Price Reversals

We would like to give you some insight on how to actually play these movements. Whether this is a true cup & handle or not, we can still play the waves and adjust our analysis of what patterns and formations are happening as time goes on.

Let’s go over some effect trading strategies for the current price fluctuations in Bitcoin.

Leverage Trading Pivotal Price Points

We do recommend crypto day traders to lean toward using small amounts of leverage when playing positions around pivotal price points. These moments can be very profitable if the trade is momentous in either direction if you play it right.

Bitcoin spent July pressing up against a hard resistance level…

July 2018 Bitcoin shown as pressing up against hard resistance level in charts

The situation explained…

Given the many failed attempts to break through ~$6,800 with conviction, the price was due for a massive pushback. Everyone went long as the price inched up in resistance territory; after a bit of stagnation, a sizable 10% price drop happened in under 24 hours.

The line in the chart shows the $6,800 resistance level. As you can see, the price touched it more than a handful of times. We received tweezer bottom candles which are bullish — this pair of candles is an indication of a bullish reversal.

Interestingly, the continuation after these candles was a slow move up toward the resistance line where candle wicks reached it four times in one week. The last time this happened, the price crashed hard. This time, the price did fall by roughly 10% but the $5,750 support area was too strong to be broken (as the market ran out of downward momentum).

So, the drop was inevitable and lead many day traders to believe the sky was falling and prices of anywhere from $2,000 to $4,000 were possible in the near future. 

How to trade such a situation…

People are trading off of emotions too much. With leverage-based plays, that strategy is especially disastrous and should be avoided at all costs. What you should do instead is focus on systematically profitable trading tactics.  

So, how would we suggest you play such a trade?

First, we would look further by examining the weekly chart. The market has been down-trending since its ATH price so we need to check the action on a longer time frame too.

Here it is…

Chart showing bitcoin downtrend after all-time high

Now the story is more telling…

The $6,800 resistance we saw, which broke through at the end of the daily chart, was a pivotal pricepoint before as well. In fact, it held for two large candles down and even sustained three weeks of hammering at the support before moving up at all. 

What we actually see here is a very large-scale descending triangle which means the lows are the same (and consistent) while the highs are closing in lower each time. We technically broke out of the descending triangle… but it’s not convincing (yet) because the volume keeps getting lower and we haven’t broken above the 100-day EMMA on the weekly.

We know if the descending triangle breaks to the upside that the result is a large upward move plus a floor secured at around the $6,800 price. A fakeout happened to the downside, although we’re waiting on a confirming weekly candle next week.

This descending triangle broke to the upside. We rose above $8,000 signaling a “reversal” but need confirmation still which takes 1-2 more weeks. As suggested earlier, the descending triangle breakout could fuel a meteoric rise to $10,000 and above due to the impending cup & handle completion.

Cup and handel pattern in Bitcoin chart

Notice how close we are to completing the cup & handle pattern? Even so, it is entirely possible for a rejection or overthrow to happen here. Prices just went above $8,000 which is only an indication that we might have broken out of the long-term descending triangle.

So we should be cautiously optimistic. Place a tight short a little above the top of the current wick ($8,400 approx) and exit your position if the price trends higher. The goal here is to catch the “overthrow” at the moment it happens, which typically occurs right after a fake breakout.

You can quickly enter into a long with a looser stop if the current resistance (around $8,500) is broken as there is a very good chance that the $10,000 battle comes to fruition…

Around $10,000 will be the perfect time to take profit and enter a tight short with a stop just above the handle channel. By trading this way, you lose as little as possible or gain significantly if the price falls apart from there.


August Price Update

1st August Bitcoin graphic

We aren’t here to make calls. We don’t want credit for that. Our goal is to educate you which can only be done by helping you visualize how we do TA and decide our trading style. In fact, if you check our Getting Started trading guide — it’s clear we wish to onboard and advance those that are inquisitive about crypto trading.

So please don’t invest based on our “predictions” … this is not financial advice.

That said, we nailed it once again …

  • We suggested a limit sell order (a short) around $8,400 which was a little above the top of the wick on the flagpole. We started this pattern after breaking through $8,000 and spent no significant amount of time consolidating in the $7,000’s.
  • Our belief was that the impulsive spike would be met with an overthrow. We pushed up too high, too fast, to believe we could have real buy volume. The biggest factor here was that the spike brought us to the resistance line… Common move right before a big push down.
  • We said a failure to complete the cup & handle and test $10,000 would cause us to come crashing back down. It would void the bullish reversal… Thus, the broken resistance at $6,800 would almost certainly fail to act as a real support on the way down.
  • The price has gone under $6,400 today (August 8th) and the market sentiment is very bearish, with strong sell volume still. We might see a bump before a big slide down, but unless it’s a fakeout we will go down further.
  • No floor is in sight. While $5,000 is a support, the closest established price floor is $3,000 which gives us considerable room to drop. We will see 100-day EMA line tests on the weekly, sooner or later, so the price could get bouncy if $5k breaks… which is great for day traders!

What if the market reverses this second? 

Stack of gold Bitcoins in front of monitor with upward price graphs

We must recover fast to above $7,200 and start a steady climb… 

Ideally, we will try to build an ascending triangle on the 4h, 12h and daily charts. As this confirms we will see another wave up which can coincide with the $8,200 resistance line breakthrough. At that point we would quickly test $10,000 and possibly catapult even higher if news like ETF approval comes out.

Also, another way to visualize a rebound is by looking at potential resistance levels on the way back up. This aspect helps you with determining the likelihood of breakouts during descending triangles — as it’s an indicator of the market’s upward momentum.


Bitcoin Reversal – Possible Resistance Levels

We saw the market create many points of resistance throughout the year so far. We’ll go over some of the more notable price points that might factor in on the rise up once we reverse.

Important note: Have you been actively day trading Bitcoin throughout the year? If so, you will likely remember some resistance levels that were faced along the way. These numbers are often not relevant as day traders are looking at shorter timelines. To get a better perspective on where the market is actually heading, we must analyze the weekly chart.

Major Resistance Level 1 – $12,000

The most notable resistance point in Q1 was the $12,000 to $12,700 range.

We saw many rebounds from below $12,000 in January — after the market started to crash in the second half of December 2017. It was viewed as a support level, but the market was in a beaten state and ended up finding a $6,000 bottom in February. Simultaneously, as it converted to a resistance, the market accepted $10,000 as being a heavy psychological resistance level.

We failed to break through after returning to just below $12,000 in less than a week. The unsustainable rise turned $12,000 into a brick wall… mega resistance for sure.

Major Resistance Level 2 – $8,500

We just watched the market pump to $8,500 in late July. The reaction was a swift drop down, erasing the three-week-long reversal pump (bull flag) completely. This harsh rejection happened when $8,500 was around the 100-day EMA level, marking the second failed test of that line this year.

The price also fell below $8,500 in May after hitting $9,990 at the start of the month. However, the market rebounded above before sliding back down. Thus, we saw an overthrow during a crash month which was an exceedingly bearish pattern to have played out.

Additionally, we spent April seeing $8,500 as a support as the price continuously fell under $9,000 but kept wedging upward. If you go back to the pump last year, it’s also interesting to note that the big bull flag up to the December all-time high started on a small candle that took us up above the $8,500 mark as well. We never turned around afterward but spent a little bit chopping the range prior to breaking up from this price point.

Future Serious Resistance Levels ???

We can assume that $6,000 could flip into a resistance if it’s broken with conviction. A downward move from $6k could send us into the $4,000’s though. At that point, we are now considering $5,000 as a resistance as well (albeit, more psychological). If the market can push below $3,000 we could see further resistance at both $3,000 and $4,000 as well.

As such, the longer we wait to rebound from here the less fuel we have for the recoil. The price building a floor at $5,000 would be tremendously bullish. In fact, the market could trade sideways at that level as it did at $220 before going up ~4x leading up to 2017.

If we get the right bullish support (such as a Bitcoin ETF), we can blast past many of these resistance levels. We must consider the bullish side also when deciding how likely it is that these resistance levels hold.


Side Question: What about the Altcoins?

Altcoin logos on white background

Bitcoin is lighting up like a thunderstorm. The echoes are felt all throughout the crypto community but the altcoin markets don’t seem to follow. We are seeing Bitcoin’s overall market capitalization rise in comparison to the rest of the crypto world.

The best way to visualize the change in altcoin sentiment is to look at the Bitcoin Dominance percentage listed on CoinMarketCap. Please keep in mind that the big drop is partly due to coins like Ethereum growing in value so much and the major surplus of altcoins on the market. The Bitcoin market share creeping up is a sign that these new, and even old, altcoins are not holding their value well.

Bitcoin and altcoin dominance chart from Coinmarketcap.com

Right now that figure has Bitcoin holding as much market share as it did back when prices pumped hard. Thus, many altcoins are falling in value during the current Bitcoin pump.

We need to be very careful here. If this is a fake reversal, Bitcoin crashing could send altcoins down at an astronomical rate. Another 30-60% could come off current prices very easily if Bitcoin makes the plummet below $6,000, and chances are such a move will put us in a stale bear market for a while.

We wouldn’t recommend trading altcoins much until this potential cup & handle plays out. The price action with altcoins afterward will be very interesting to see. If Bitcoin continues to go up it means many traders are longing bitcoins and quite a few will diversify into alts.

The result of this could very well be a relief rally that brings altcoin prices up by 50-100% or more. However, the upside potential of altcoins is very limited iif Bitcoin can’t find a bull rally and escape the four-figure price range.

August Altcoin Market Update

Crash, crash, crashhhh ….

The altcoin bear market is back on right now. The term “altcoin graveyard” has surfaced in recent months. While we did see some bounces (just like with Bitcoin), by now we know the past reversal attempts were not real. We’re still seeking a reason to reverse from a TA perspective… and many altcoins have questionable value — this is extra bearish now that we’re in a more rational market.

Bitcoin’s market cap dominance in the crypto space is sitting at 48.9% right now. Many folks do not know how fantastic that stat is from a technical perspective. Not only did BTC fall 10% in value on the day of this screenshot — we now have many, many more cryptocurrencies which make up the overall crypto market cap.

Bitcoin and top altcon market dominance percentage graph from Coinmarketcap.com

We like this situation because it means funds are being siphoned out of ICOs and long-term altcoin holders are selling out. BTC’s falling value means bigger players are less inclined to play market makers for the alts they invest in as well. Plus, for Bitcoin, the price is going down for as long as all the “weak hands” are still selling… the whole industry is experiencing a financial shift.

Most notably though, alts are getting absolutely shredded and will have a significant bottom… plenty will stay dead and never find respectable trading volume, but some big winners will drastically outperform Bitcoin on the way back up.


Conclusion

Without a doubt … we are still trying to break through this long-term downtrend. The weekly chart needs to switch bullish for a long-term long to make sense. Keep watching that 100-day EMA and place your stops carefully!

The market does not always move logically but the strength of the movement is typically dictated by the market sentiment. We’ve seen many attempts to find new bottoms and all selling strength went away after the $6,800 breakthrough. Now it all comes down to seeing how much of this pump is sustained. If we stay above $6,800 forever, we’ll be making another leg upward which will certainly put us to the top of the cup and into the handle channel (bullish). 

On the flip side, we could very well see the price movement get rejected at any time. If Bitcoin fails to complete this cup & handle formation (if we don’t see a test for $10,000), we will see a big bearish leg down. The result would be prices reaching the $5,000 to $5,750 price range very fast once $6,800 fails to act as support. Either way, the price movement is more volatile and we will be seeing some big swings (great for day traders!) for the rest of this summer.

Further Reading At TotalCrypto.io
1) Do You Think Altcoins Are Due Big Upside? Read Our Top 10 Altcoin Trading Tips Before Jumping Into The Deepend.
2) Not Got An Account At The Home Of Altcoin Trading Yet? Learn How To Trade On Binance And Get Access To Over 100 Altcoins.
3) Want To Trade Crypto But Not Got The Time To Site At A Computer All Day? Learn Our 30 Minute Scalping Strategy For Time Pressured Traders.
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