BTC:USD was unable to break through its long-term downtrend trend line. More accurately, it was unable to break the overhead resistance shown in orange on its first and--arguably--second attempts. This sent price back beneath the long-term downtrend line.
There are 4 primarily scenarios as to what price will do next:
1. (My personal favorite) H&S reverse to breakout point.
2. Retest of orange overhead support
3. Continuation down before reversing at one of the fibonacci levels (most realistic).
4. Continuation below the "bottom" low into new bear territory with minor bounces along the way.
From my perspective it appears price is short-term reversing at a confluence of the .236 retrace and previous support. If price does reverse, it will likely come into contact with the purple trendline again. If it reverses from this level, it will be well on its way to forming a head & shoulders pattern which, if completed, implies a retest of the ~$8600 level, the original breakout point from the inverted head and shoulders bottom. The 50% retrace is also at this level. At which point it would be expected that price bounce again...likely it will continue up and not look back, but perhaps it will dead cat -> down. I feel this is a balanced but perhaps a fanciful scenario. By the time of publication it will be clear whether scenarios 1 and 2 are a possibility.
Alternatively, price may continue beyond the purple trend line and retest the overhead support, at which point price would be expected to fail briefly before potentially breaking through. This is the ultra-bull scenario.
Or, price may not reverse at the tentative H&S neckline and may instead continue downwards toward the .38 and .5 retrace levels. This would result in a healthy correction to the established price action by putting in a nice higher low and suggesting bullish continuation, especially if price stops at the 0.38 retrace. If it proceeds to the 0.5 retrace we would also have, in effect, a re-test of the inverse H&S neckline, which might confirm a bottom and therefore the end of the bear market. However, further price rise would not be expected to be as powerful. If it proceeds to the 0.68 retrace and rebounds, price will be severely weakened and a rapid recovery is not to be expected.
Finally, price may break all these levels, retest the lows, and proceed lower. This is the ultra-bear scenario, but wouldn't be out of the question given we are currently in bear market status by my estimation, also the 3K--implied by past corrections which have been in the mid 80% declines--and (potentially 1.3K--near the high of the previous run up) targets have not been achieved.
Trading tactics:
Trading scenario 3 on the short side is already out of the question. Short entry would have been the retest of the light blue channel. Take profit levels are the 0.38 and 0.5 Fibonacci levels. At these levels one might choose to go long depending on the price action, but immediately move stops to protect profit and prevent loss as price climbs, in case it proceeds to a further level. If one expects a 0.5 retrace, short on bounce off of 0.38 level, but this would have to be managed expertly.
Trading scenario 1 is relatively straightforward. Wait to short at the 11200 level on the shoulder. I would place stop around the 11400 level. Bear in mind that the right shoulder may not reach as high as the 11200 level, but I would not place a trade below the 11100 level. If price continues on toward overhead resistance, one would be stopped out.
Scenario 2 would then be in play. One might short around 11700 and wait for a decline (but once again, protect profit will stops). Price might break this level right away, make another run at it after a decline, or, after testing it, form a double top and proceed downward. A retest of this level would be a bullish event, however, since price would be above the long-term pink downtrend line. It would also have had the strength to evade forming a head and shoulders pattern at the pink line AND to have defeated continuing to the lower Fibonacci levels. Thus one should expect a break of this resistance to be in short order and therefore the best trade is likely to go long at the bottom (perhaps retest of pink) after the initial decline.
Scenario 4 requires the most caution. It will initially behave like scenario 3, however, will continue to break level after level. The most conservative play would be to short upon a conclusive break of the 0.618 retrace. The target would be the $6000k level initially. Price may double bottom here, so I would personally close short positions before this level and go long at this point if volume began to pick up but protect profits aggressively with a stop loss. This could be bitcoin's ultimate bottom. So be respectful and be sure to take profits. If a bounce from that level begins to roll over and fail, however, I would short again with targets at the much-anticipated 5K level, and then the 3K level. Beware though, in the extremely bearish case, price could go as low as the 1000s.
Note on trading instruments: I know of 3 ways to take advantage of this price action. All have their nuances and potential pitfalls. The least useful is the Greyscale Bitcoin Investment Trust (GBTC). This is because it is a long-only penny stock which tracks the price of bitcoin +70% or so typically. In addition, trading hours are limited to regular market hours, a dangerous way to play this at this time. The second are the various bitcoin futures. Be aware, however, that these cease trading at the end of the extended (verify for your broker) hours session on Friday. Thus one will be locked into a position over the weekend if one does not exit. Stop losses will not work and large losses could be incurred. The best is through a bitcoin exchanged called Bitmex. The disadvantage of this method is required to put up actual bitcoins as collateral. As far as I know, however, the exchange does not close, so one would be able to react to each turn of the market.
After reading this you might decide to stay out of the market altogether until price action becomes clearer. But if you choose to trade, good luck, and good skill!
---Addendum.
I am in a bind in that I still have physical bitcoin assets. It is of first priority to manage these properly. Given the complexity with regards to trading in the current environment, it will not be easy. Second priority is to use futures to profit on anticipated price direction.
Scenario 1 is straightforward. Sell the (formely) $2000 USD worth of bitcoin I purchased on Coinbase---sell on GDAX this time. Then also short at this 11200 level. As always, tighten stops if possible.
In case of scenario 2: stops will be tight so I will be stopped out of scenario 1 trade. Buy on retest of pink trendline and monitor carefully.
Scenario 3 is more difficult (and of course 4). When will price stop is the question? Magic seems to think it will stop at the .38 resistance level (a bigger inverted H&S pattern). So basically the futures strategy will be to buy each level when price seems to be bottoming, but aggressively move up stops. I will be paper trading this. It'll be difficult to know if it's best to sell the coinbase holdings, however. Honestly the best time to sell was when price was declining from the failed breakout attempt, but I did not recognize this as such at that time. That is why I became so sad when the trade went sour: I hadn't considered all the possibilities, and certainly wasn't using longer-term time frames...I was counting on the breakout. Over-leveraged. With poor risk management. And my accounts definitely paid the price as a result. This was a horrible oversight. Good news is I had enough discretion not to plow everything into what I considered nearly a sure thing. Stayed within the 5% for high probability trades, then moved stops up to make that 2%--even though they did not trigger since I used the wrong type, and catastrophic loss resulted, I still did not lose more than 5% of account in Ben's case, 3% in my case. So there is a victory to be celebrated here: proper trade sizing prevents calamity, read all about it! But still, the trade was a bad one, mostly because the analysis was not thurough and I decided to fomo entry AGAIN.
It looks like my funds may just be "stuck" in coinbase for the time being. I am running out of gas for my lifestyle (due to my investment of 1/3 of it!). May need to draw from my trading accounts. Will definitely need to start the business soon so I can draw from Ben's. 10K or so there I'd say he's owing. That'd be enough for awhile.
Problem is scenario 3 and 4 are just so...shall we say...disturbing. I don't want to lose. The other thing can do, of course, is hedge my .18 btc with...no wait, futures contracts are 1btc. overkill for sure. That's kindof good news though, because one short contract can make up for the physical decline I may experience.
So here's the gig. If price breaks below the supposed head n' shoulders formation, I will short 1 futures contract in my personal account with a TP target of that 9500 retrace. I will take profits out and funnel them to my bank account, since this is to offset the Coinbase investment. I will not trade Ben's account, will wait for better opportunities. Then on rebound, I may short again. We will have to see. On break of .38 level perhaps.
Plan in place. Now I just need to monitor the markets and look for that break. I will set alert on etrade
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