Bitcoin’s interrupted 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 chance that Bitcoin price will fall soon. He cites a textbook technical indicator that predicts declining reversal patterns.
The pattern known as „head and shoulder“ appears during an asset’s uptrend. Traders acknowledge it when they see three highs forming on a support-like baseline.
The middle peak is higher than the other two, so that it looks 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 structure’s maximum elevation. Prince comments that Bitcoin forms a similar technical setup, with the left shoulder and head fully confirmed and the right shoulder partially fixed.
„Bitcoin is already being traded in overbought zones,“ he adds. “That doesn’t mean that it can move higher and make new highs. However, the downward prospect should by no means be underestimated. Bitcoin moves in zones in which a rapid reversal and change of direction can be established more easily. “
If the H&S pattern is valid, Bitcoin risks being about $ 1,600 below its baseline (the level between the high and the support). The yellow area in the graph above shows the ideal target area for the H&S outbreak.
What risks Bitcoin is exposed to
Prince’s bearish outlook for Bitcoin received involuntary support from the cryptocurrency futures market. According to Glassnode, the average „funding rate“ across all Bitcoin exchanges has risen to levels suggesting that traders may have been over-leveraged through open-ended contracts.
Measured every eight hours, the refinancing rate shows the cost of holding a bullish contract, that is, a long position. A positive value indicates that bulls are paying bears.
This increases the value of the perpetual contract via the Bitcoin spot rate. Hence, a very high refinancing rate signals that leverage is unduly skewed in favor of the bulls. It is an overbought condition.
An event of a pullback in the cash market can lead to massive long liquidations, which can lead to more price declines and higher volatility.
The optimistic perspective
However, Prince also believes in a limited corrective downtrend. He writes that Bitcoin could find support at the H&S neckline in order to rise higher again – and that could invalidate the entire trend reversal theory as a whole.
„Since Bitcoin still has solid supports [near] the 65 EMA and the blue horizontal support, the bullish breakout has a greater 65% probability“
Its upward outlook sees Bitcoin at over $ 19,000.