Following the relentless bloodletting of the past two months, an inverse H&S pattern on the bitcoin chart seems almost to good to be true. And yet, stranger things are known to have happened.
In case you are wondering, an inverse H&S is shorthand for an inverse head and shoulders. Also called the head and shoulders bottom, this is a chart pattern that often turns out to indicate a downtrend reversal. It is not completed yet, but as things currently stand, this could happen in the coming days.
In other words, we are about to see whether the bitcoin bulls have gained sufficient confidence to return some hope into the dispirited cryptocurrency markets.
Dead cat bounce or reversal?
In mid-december, bitcoin finally reversed the brutal sell-off. The obvious question was whether this will turn out to be a dead cat bounce, a temporary relief, followed by more downside? Or, on the other hand, will it signal a more proper reversal of the downtrend?
This still remains to be seen. We can usually identify dead cat bounces only after they take place. However, identifying a reversal is more doable, with the inverse H&S pattern also offering fairly reliable information on when and where to enter a long trade.
It is similar (but inverse) to a head and shoulders top pattern. In an inverse H&S, the price is falling until it comes to a certain point where there is a temporary reversal (left shoulder) until the bears take over again. Once the price reaches the lowest point (head), it turns around. This rise is followed by another dip (right shoulder) down to approximately the same value as the 1st shoulder. Once the price breaks neckline, the pattern is complete and we get the signal for trend reversal.
Bitcoin inverse H&S pattern and the daily time frame
As you can see, the possible inverse H&S started forming around the 24th of November, when the price decline became somewhat less steep. After the $3500 territory offered some support (left shoulder), a dead cat bounce led into further decline that reversed at about $3150. A strong uptrend formed a fairly convincing bull flag. The Christmas eve blessed us with a breakout. However, it was a fake breakout (or a fakeout, as they call them). A sharp sell-off followed and allowed for a quick dip into the $3500s (right shoulder).
So, the November dead cat bounce and the December bull-flag give us a pretty discernible neckline. As I see things, it stands at about $4000. This is a resistance area that is in confluence with the 50 day MA. However, if I use the wicks as resistance references, the neckline could also be drawn a bit higher, around $4150. This area is in confluence with the 50 day EMA. One way or another, bitcoin is currently very close to a strong resistance area.
There are two RSI levels on the daily chart to watch out for. Breaching above 55 means a neckline breakout. Breaking below 43 means… more drama.
I’ve outlined an optimistic case for bitcoin, but I must admit – I am skeptical. During the past two weeks volume has been steadily declining. I’ll only be thinking of putting my bullish hat on after we break above $4150. Even then, neckline break will still offer only a temporary respite. The lower boundary of Ichimoku cloud stands at $4300 and bitcoin didn’t manage to break above it since July 2018.
As for now, I’ll be looking at a couple of less sunny price levels. In case of a strong break downward, the lower side of the descending channel comes into play again.
However, the path towards the $2800 has two support levels. One is the 2018 btc bottom, at $3121. The other one lies at around $3400 (signaled by the VPVR indicator, the gray horizontal chart on the right). Since the market is relatively hot I expect strong buying pressure in the $3400-3500 range. At least a temporary bounce will surely commence.
Sideways market and altcoins
While the inverse H&S is the ‘big’ pattern that will set the tone of the coming weeks, the smaller time frames are offering the good old sideways market.
The last two weeks were pretty hard on people trading usd pairs, as a whole bunch of fakeouts in either direction took place. However, the range forming around $3800 was pretty good for alt btc pairs. Two recent bull-breaks took place on the Chainlink (LINK) and Tron (TRX) charts. Both of them had a really nice run this week. More similar setups are in the making as we speak and as long bitcoin will keep ranging sideways, some very tasty trades will be available even without the coveted inverse H&S.