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 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 indication that free-floating supply has left the market and will likely trigger the more bullish investors to test market demand.

Also, it is important to note that the daily candle has yet to close. It is entirely possible that the daily candle closes with the TR, at which point we will be forced to reevaluate the market. However, given the pop in sell volume that surfaced today, it is likely just a matter of time until we retest the support beneath the TR. If we manage to break beneath the support, volume will give us several clues as to whether a continuation of the downtrend is more or less likely.

If we see a test of the lows and the volume is increasing, that is a great indication that supply is still present in the market and we will likely see a push to new lows. If the support fails, there isn’t a whole of support beneath us:

Figure 3: BTC-USD, Daily Candles, Next Levels of Support

Because bitcoin rose in such an aggressive, parabolic manner, there weren’t many chances to establish support levels on the way toward its all-time high. The figure above shows how we cleared a large price spread in a very short period of time without any pit stops along the way. If we break a new low on convincing volume, we can expect to see a quick 15% move to test the support outlined in green in the figure above.

As it stands, all of this is just conjecture. However, anytime a market breaks and closes below a TR, it’s time to start considering the potential market ramifications. In our case, we have two very different possibilities with two very different outcomes. For now, bitcoin still remains in a no-trade-zone and will remain there until I see how the market reacts to the support tests.

Summary:

1. BTCUSD broke below its TR on a high volume.
2. If the daily candle closes below the TR, it is likely we will see a support test as the price will likely drift lower.
3. The volume profile will be very important here: If the volume tests support on decreasing volume we have a potential inverted head-and-shoulders setup.
4. If we test support on increasing volume, this will be a great indication that we will likely continue lower as supply is present in the market.

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