Bitcoin’s uninterrupted rally has increased the likelihood of a major pullback, according to independent analyst Vince Prince.
The TradingView.com author writes that there is a 35 percent probability that the Bitcoin price will fall soon. He cites a textbook technical indicator that predicts downward reversal patterns.
The pattern known as „head and shoulder“ appears during an asset’s uptrend. Traders confirm it when they see the formation of three highs on a support-like baseline.
The middle peak is higher than the other two, making it look like a head hanging over two shoulders on each side – hence „Head and Shoulder.
The H&S patterns typically end in a breakout below the baseline, with a downward target well below the maximum height of the structure. Prince comments that Bitcoin forms a similar technical structure, with the left shoulder and head fully confirmed and the right shoulder partially fixed.
„Bitcoin is already being traded in overbought zones,“ he adds. „This does not mean that it can move higher and create new highs. However, the bearish perspective should never be underestimated. Bitcoin is moving into zones where a quick reversal and change of direction is easier to establish“.
Bitcoin is in a weird spot
futures funding rates = very overbought, very overheated
RSI on lower time frames = oversold, esp 4h
Price currently at support, resilient above $18k
– Joseph Young (@iamjosephyoung) November 22, 2020
If the H&S pattern is valid, there is a risk that Bitcoin is about $1,600 below its baseline (the amount between the peak and the support). The yellow area in the graph above shows the ideal target range for the H&S breakout.
What risks does Bitcoin face
Prince’s bearish outlook for Bitcoin received involuntary support from the futures market for the crypto currency. According to Glassnode, the average „funding rate“ across all Bitcoin exchanges has risen to levels indicating that traders may have become overly leveraged by open-ended contracts.
Measured every eight hours, the funding rate indicates the cost of holding a bullish contract, i.e. a long position. A positive value indicates that bulls pay bears.
This increases the value of the perpetual contract above the spot price of Bitcoin. Therefore, a very high refinancing rate signals that the leverage is unduly distorted in favor of bulls. It is an overbought condition.
An event of a withdrawal on the spot market can lead to massive long liquidations, which may result in more price declines and higher volatility.
The optimistic outlook
However, Prince also believes in a limited corrective downward trend. He writes that Bitcoin could find support at the H&S neckline to rise higher again – and this could invalidate the entire trend reversal theory altogether.
Bitcoin Upward Setup by Vince Prince.
The conclusion of Vince:
„Since Bitcoin still has solid supports [near] the 65-EMA and the blue horizontal support, the bullish breakout has a higher probability of 65%“.
Bitcoin sees its upward outlook at over $19,000.