Last week’s big drop below the downtrend line appears to be a fake-out. Bitcoin now trading back inside the bullish pennant.

 

Head fake south?

On Wednesday of last week (August 28th, 2019), Bitcoin dropped between two key and important levels. The first being the 4/8th Major Harmonic level at $10082.50 (the most difficult price level for price to cross from the all-time low to the all-time high) and the second being the break below the first uptrend line in a broader bullish continuation pattern: the bullish pennant. There were several very bearish signs on the daily, 4-hour and 1-hour charts as well. On the daily chart Ichimoku chart, Bitcoin was trading in a very dangerous and bearish condition where both the Chikou Span and price were below the cloud – the Chikou Span was also below price action an in ‘open space’. The 4-hour Ichimoku chart showed a strong bearish continuation setup when the Chikou Span broke below the candlesticks and price dropped back below both the Kijun-Sen and Tenkan-Sen lines. The conditions of the 4-hour chart were very much the same for the 1-hour chart. Those conditions no longer apply on the faster time frames.

There is some strong evidence to suggest that the break down below the levels discussed in the paragraph above are part of a broader condition known as a bear trap. Bear traps occur when enough conditions have been met to warrant a strong entry into a short trade – but then the price action reverses to the bullish side of the market. Traps are often precursors to some powerful and volatile price action. For a bear trap, the volatility and price action is so active because many traders who went short based on sound technical levels are now analyzing their positions to decide whether to leave the short, add to the short or wait it out. Regardless, as prices move higher, more and more traders who are short will need to cover those positions – converting the sellers into buyers and adding those buyers to the long side of the market.

In addition to the psychological condition of the possible bear trap, there are some strong reversal indicators on faster time frames. The 1-hour Ichimoku chart shows price, the Kijun-Sen, Tenkan-Sen, and Chikou Span all above the Kumo with future Senkou Span A above future Senkou Span B. The 4-hour chart is showing both price and the Chikou Span are above the cloud as well. From a daily perspective, we are still in a bearish biased environment because price and the Chikou Span are below the cloud. However, the current slope and directional move price action are quite strong. From the present value area at $10373, the top of the current daily downtrend line is at $11296, roughly +$900 from where we are now. I am looking for to add to my position if both price and the Chikou Span are above the daily Kumo, along with the Chikou Span above the candlesticks and in open space. The earliest this could happen from today’s current candlestick would be tomorrow if the Chikou Span could move and close above $12192. The threshold for the two conditions to be met does decrease as time moves on. For example: If price was trading at $11182 on September 14th then that would be the entry-level. But given the nature of how the Chikou Span reacts so strongly to the same support and resistance levels that price does, I wouldn’t anticipate a major break higher until the Chikou Span reaches the thinnest part of the Kumo: the Kumo twist. This means we would need to wait 15 more trading days (September 17th, 2019).