After a feeble rally on diminishing volume, bitcoin is currently in the middle of its first major pullback in about 2 weeks. Over the last week or so, bitcoin managed to break its sustained downtrend and trend back inside the macro trading range (TR) — both of which are quite bullish market characteristics. However, today’s pullback has us retesting the support of the macro TR (outlined in blue):
Figure 1: BTC-USD, 1-Day Candles, Macro Trading Range
As noted our previous market analysis[1] of bitcoin, the market has been confined by a well-defined trading range. While it is inherently bearish to push below a trading range, there are a couple arguments that can actually put a bullish twist on the deep test of support.
Oftentimes, in accumulation TR, there is a shakeout known as a “spring.” A spring serves not only to trap eager bears but to create liquidity for the more aggressive bulls. One characteristic of a spring is a subsequent retest of the market supply. Typically, the retest will fail to reach the lower low and, ideally, will be tested on decreasing volume.
While we are currently seeing a peak in volume, we will have to keep an eye over the next few days and see if the volume falls off as it tests new lows. Fortunately for the bitcoin bulls, a low volume retest of the spring support would correspond to an inverted head and shoulders reversal pattern setup:
Figure 2: BTC-USD, Daily Candles, Inverted Head-and-Shoulders Setup
Right now, this is nothing more than a potential setup and is not currently an actionable market move. An ideal inverted head-and-shoulders setup would have a lower left shoulder and consolidating volume across the length of the pattern. The consolidating volume is a great
