don’t look up…- Bitcoin has started a nice rebound since the end of January 2022, climbing almost 40%. This rebound was against the tide, as most analyzes were bearish. Crypto players were seeing Bitcoin at 30k or less. This is something that Bitcoin knows how to do very well: surprise us! The rebound is over? It is possible, and we will see why.
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The Pattern Bitcoin Could Reproduce
To understand what follows, you need to know whatstochastic indicator. To put it very simply, it is an indicator of bounded momentum. It looks like the RSI indicator with an area of overbought and an area of oversold. The stochastic is very interesting to identify divergences with the course but also to identify movements giving rise to high volatilities. This is what we will see in this article. The Stochastic is set as follows: 34.5.5.
For example I will take the contraction from May to July 2021 that we experienced:
We will review what happened May to July 2021 using the stochastic indicator. A first phase was marked with the contraction stochastic (orange triangle). This shows that the sellers have their hands on the momentum, the price falls. Then the stochastic comes out of its contraction (output in purple) and results in a bounce. The price rebounded from 33.5%. Here, the indicator could not move towards the overbought zone (above 80) and brought a false bounce (fake out).
We all remember that moment when we once again passed under the $30,000 in July 2021. It was clearly the social media apocalypse. On the stochastic side, we did a retest. We go back slightly in the oversold zone by crossing bullish. Behind this, the price climbs 80% with a real bullish rally and an uptrend on a daily basis.
To sum up, we can say that when the stochastic contracts, the exit may result in a false bounce and then a true uptrend.
There are many examples in Bitcoin’s young life and we can see another. A contraction that began in July 2018 leading to a bullish rally until June 2019:
We have to get back to 2018. Bitcoin is in downtrend (bearmarket) and the stochastic contracts. This indicates that the bearish players have the momentum and the price is falling. We have an output of this contraction with a fake out giving rise to approximately 30% of increase. The Stochastic returns to the oversold zone. When exiting the oversold zone, it is the beginning of the real rise with a uptrend well marked. At this time, Bitcoin registers 290% of increase.
As you will have understood, this pattern is interesting for Bitcoin and speculative assets in general. Of course, these are not certainties and it is important to know manage your risk as in any investment or trading strategy.
What if Bitcoin was in this situation again? Let’s study this funny hypothesis.
Bitcoin experienced the exit from contraction: fall then bullish rally?
As we know, Bitcoin is in a potential squeeze shorts. The indicator contracted again during the bearish period. The bearish players had their hand:
Since the local top found in November, Bitcoin has dropped more than 50%. In parallel, the stochastic began to contract as in the previous examples. Since then, the rebound has given 38% up as of this writing.
The rise is not necessarily over but the stochastic indicator is entering the zone of overbought. When the indicator reaches the overbought zone, this does not mean that you have to sell. The indicator can stay in this zone for a long time. The hypothesis indicates that the stochastic should return to the zone of oversold in the coming days. The timing is impossible to know. In this case, Bitcoin should go back down.
Testing the oversold zone should result in a higher increase than the previous one.
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Areas to watch for the potential next rally
From a day-to-day perspective, Bitcoin is coming up against the $46,000. After taking a bullish momentum on a daily basis with higher and higher lows and highs, it is currently on a resistance important. If it fails to break through this resistance, there are some interesting areas to look lower.
Interestingly, the US Federal Reserve called an emergency meeting for Monday, February 14 because of inflation. Inflation is 7.5% in the United States, a figure higher than forecast. Assets may experience volatility during the meeting depending on the decisions that will be taken.
Downside targets in the event of a decline?
First, there is the first stop (0.382 Fibonacci retracement) to $41,000. Technically this is a zone to hold if bullish players want to see Bitcoin continue to rise. At the same time, it is likely to see the price return to the so-called “W” structure. It is a well-known reversal structure for traders and often the neck line is reworked. The neck line it is located at $39,300.
If the first stop is lost, Bitcoin will likely redirect to the reload zone between $38,000 and $35,700. Of course, on a panic, we can completely consider returning to the lowest at $33,000.
Bullish targets in the event of a rebound?
In the scenario explained above, the low is confirmed when the Stochastic has touched the oversold zone and it starts to rise again in crossing bullish as in the examples. If the scenario is confirmed, there are logical areas where Bitcoin could head. First of all $52,000, because it is the high of the last range. It would be a resistance powerful for Bitcoin.
Then, we observe that the decline of Bitcoin was brutal without a rebound from $69,000 to $42,000. On the road, traders who bet on the downside (shorts) placed their stops, logically, on the highs of $57,000 to $61,000. This area corresponds exactly to the shorts reload area. This is a statistically reachable zone during a rebound. A great area where the bears have the opportunity to regain control. Finally, it will remain the all-time high at around $69,000.
Bitcoin is in a situation that resembles May-July 2021 and much earlier situations like 2018-2019. The stochastic indicator has come out of its contraction and we are currently in the false bounce of this hypothesis. It is possible that the rebound has ended. Embarked by a feverish macroeconomics, it could be that Bitcoin is redirecting lower before starting a new uptrend.
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