I smell a Bear trap in crypto
Bear traps and bull traps are frequent and common occurrences in any market and on any time frame. One of the more typical forms of traps we see in cryptocurrencies happens during lulls in the marketplace: weekends, holidays and ‘off’ hours. They also occur at particular price levels where there are equally profitable long and short trade possibilities. What happens during those moments is people wait for a clear direction. And what happens when everyone is waiting? Nothing. That is when someone comes in and makes a move – but in the opposite direction.
Ever since the 24th of July, we’ve been trading is a pretty tight range: the 8192.22 value area. Price has literally been coiling around that particular price zone for over a week. We had one ‘heads up’ moment (number 1 on the chart) on the 26th where prices shot down and promptly rallied some hours later. Nevermind the cause for this drop, what’s important is that it represents a ‘test’. Those kinds of probing moves test what traders are doing and how they’ll react to another attempt in that direction. It’s clear what happened: people sold. But what happened after? Price consolidated and prices rallied. We are seeing a similar repeat of that price action today. This is forming what’s called a Bear Trap.
The Bear Trap get’s set by manipulating prices lower during a low volume trading time. It’s easier to move a market when there are fewer participants. The drive lower today (number 2) was done during the London close and the US lunch hour. This is a low volume area not just because professionals are out to lunch, but everyone else is also out to lunch. In fact, there are specific strategies that trade just the lunch hour open/close in the Futures markets. Anyway, this kind of move entices people to take a short at the bottom and makes new traders want to abandon their positions out of fear. But more importantly, the goal is to get as many people to enter short positions as possible and give them ‘hope’ and the adrenaline rush of crashing prices.
Only to have price action reverse. And as prices move higher and higher, short traders get more and more uncomfortable and end up covering their shorts causing a short covering rally. Hence: a bear trap.
Now, there is certainly a case where this bear trap could extend lower. I certainly see prices testing the 7462 value area before we make another leg up. In fact, for a great bear trap to form a return to the 7562 zone would be very desirable. However, given the bullish nature of this market over the past 30-days, the current drive may be as far down as it goes. Either way, watch your stops!