Bitcoin - Are You Prepared For a Raid - When Buyers Exhausts
Bitcoin' continues to consolidate as the market looks for direction, however are buyers drying up? The current pattern and price action may hold the clues and it may be prime for a market short raid.
Overview:
The initial rally off from 3100 caught a lot of shorts by surprise, however, it appears that momentum is stalling, and perhaps starting to show some bearish elements. Now nobody has a crystal ball that can predict the future moves, but there are some signs in the price structure that buying might be drying up.
Patterns & Context:
After a 25% rally we would expect a typical corrective pattern as market participants close positions. There was an expectation that we rallied to retest the previous high or fall somewhere slightly above or below it before retesting the low in late December that is defined by the initial trend line. Instead of a bullish swing we are starting to see a range bound market consolidating in the form or a triangle. This is one of those patterns that has mixed results or is pretty much a coin toss. In solid trending bull markets, we can assume a continuation will happen, however, when the broader trend is bearish the results are more mixed.
Trading patterns alone will lead to mixed results over time. Few patterns consistently are recognized as being bullish or bearish as the form randomly on charts, it is important to take into account "context" of the market, not just the formation of a pattern. What I mean to imply is that in trending markets, triangles, flags and other patterns are generally consolidation patterns before the trend continues. In strong trending markets these are valid trade signals, however statistics show that over thousands of random formations the results are more of a coin flip.
So we take into context position, broader trend, and time when determining the strength of a pattern. These additional variables either increase or decrease the probability of the outcome. In this specific situation we have an initial bullish swing out of a broader bearish trend, which decreases the probability of a continuation up. I am not implying we can not move up, what I am saying here is in the context of the trend the probability of breaking out to the upside is reduced.
The other variable we are looking at is strength of buyers. If buying was strong we would see a retest of the previous high, or at least a retest of the 3975 on the next bullish swing. Since this did not develop and in lieu of a solid bullish swing, we have a lower high off a pretty deep correction following the engulfing candle we take pause. Initially this is not a concern but Bitcoin' is struggling to maintain above the midpoint of this candle and has failed to take out the inside bar of the following one. This is a sign of weakness not strength and the longer it lingers the weaker it becomes.
In addition we are seeing volume dry up or buyers losing control. The risk at this time (though we remain bullish in the broad term) is that market impatience takes hold, those that recently bought start closing out positions, volume dries up, and shorts see weakness and raid the market. Now I am not talking about the retail short trader, I am talking about the larger operators in the market. Call it manipulation or whatever but large operators are part of the game, you don't like it, find something less risky.
Bottom Line:
Nobody has a crystal ball and markets are the perfect discounting mechanism. There is no reason we can not rally towards are 4140 target or even swing up towards 4500. However this is an area we are being cautious and is a coin flip at best. We are between a minor resistance and support (3975 and 3650) and until we see a break either way we will just remain on the sidelines and let the market determine the direction. If we do break to the downside we are looking at the 3200-3400 area to find support. We would rather trade or add out of support than take a risk at an area where it is pretty much a coin flip, and weighted slightly to the downside.
Now all this has happened during the weekend, and over the past couple months we do not see too much activity until later Sunday night. We will monitor the market at this time and look for a swing trade if and when the opportunity provides. However, if we keep moving horizontally we are likely to see lower prices in the near term. If there was an opportunity for a short raid the current market is a perfect candidate. We have written about "market raids", and what to look for, and this is simply one of those times. Overly bullish going in, volume drying up, time is elapsing without a significant move higher, all the things we wrote about in our "market raid" article.
Again whether it happens or not is insignificant, in the end it is about risk management. The question is are you more concerned about missing a rally or getting caught in a potential short market raid?
There are infinite amount of opportunities to trade in markets, but capital is not infinite for most. Personally I would rather not risk trading capital when the environment is sketchy at best, and will wait for a better trade setup. As far as inventory management we are looking to add if a pullback shows support and a reversal sign.
Overview:
The initial rally off from 3100 caught a lot of shorts by surprise, however, it appears that momentum is stalling, and perhaps starting to show some bearish elements. Now nobody has a crystal ball that can predict the future moves, but there are some signs in the price structure that buying might be drying up.
Patterns & Context:
After a 25% rally we would expect a typical corrective pattern as market participants close positions. There was an expectation that we rallied to retest the previous high or fall somewhere slightly above or below it before retesting the low in late December that is defined by the initial trend line. Instead of a bullish swing we are starting to see a range bound market consolidating in the form or a triangle. This is one of those patterns that has mixed results or is pretty much a coin toss. In solid trending bull markets, we can assume a continuation will happen, however, when the broader trend is bearish the results are more mixed.
Trading patterns alone will lead to mixed results over time. Few patterns consistently are recognized as being bullish or bearish as the form randomly on charts, it is important to take into account "context" of the market, not just the formation of a pattern. What I mean to imply is that in trending markets, triangles, flags and other patterns are generally consolidation patterns before the trend continues. In strong trending markets these are valid trade signals, however statistics show that over thousands of random formations the results are more of a coin flip.
So we take into context position, broader trend, and time when determining the strength of a pattern. These additional variables either increase or decrease the probability of the outcome. In this specific situation we have an initial bullish swing out of a broader bearish trend, which decreases the probability of a continuation up. I am not implying we can not move up, what I am saying here is in the context of the trend the probability of breaking out to the upside is reduced.
The other variable we are looking at is strength of buyers. If buying was strong we would see a retest of the previous high, or at least a retest of the 3975 on the next bullish swing. Since this did not develop and in lieu of a solid bullish swing, we have a lower high off a pretty deep correction following the engulfing candle we take pause. Initially this is not a concern but Bitcoin' is struggling to maintain above the midpoint of this candle and has failed to take out the inside bar of the following one. This is a sign of weakness not strength and the longer it lingers the weaker it becomes.
In addition we are seeing volume dry up or buyers losing control. The risk at this time (though we remain bullish in the broad term) is that market impatience takes hold, those that recently bought start closing out positions, volume dries up, and shorts see weakness and raid the market. Now I am not talking about the retail short trader, I am talking about the larger operators in the market. Call it manipulation or whatever but large operators are part of the game, you don't like it, find something less risky.
Bottom Line:
Nobody has a crystal ball and markets are the perfect discounting mechanism. There is no reason we can not rally towards are 4140 target or even swing up towards 4500. However this is an area we are being cautious and is a coin flip at best. We are between a minor resistance and support (3975 and 3650) and until we see a break either way we will just remain on the sidelines and let the market determine the direction. If we do break to the downside we are looking at the 3200-3400 area to find support. We would rather trade or add out of support than take a risk at an area where it is pretty much a coin flip, and weighted slightly to the downside.
Now all this has happened during the weekend, and over the past couple months we do not see too much activity until later Sunday night. We will monitor the market at this time and look for a swing trade if and when the opportunity provides. However, if we keep moving horizontally we are likely to see lower prices in the near term. If there was an opportunity for a short raid the current market is a perfect candidate. We have written about "market raids", and what to look for, and this is simply one of those times. Overly bullish going in, volume drying up, time is elapsing without a significant move higher, all the things we wrote about in our "market raid" article.
Again whether it happens or not is insignificant, in the end it is about risk management. The question is are you more concerned about missing a rally or getting caught in a potential short market raid?
There are infinite amount of opportunities to trade in markets, but capital is not infinite for most. Personally I would rather not risk trading capital when the environment is sketchy at best, and will wait for a better trade setup. As far as inventory management we are looking to add if a pullback shows support and a reversal sign.
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