Yesterday, January 10, 2018, Bitcoin (BTC/USD) dropped by more than 12% from the day’s high of $4,036. The sudden drop is an indication that the market is not yet ready to trend higher. It reminds us that Bitcoin is in sideways consolidation. This can mean one of two things.
Either we are trading sideways as a brief pause to the strong downtrend or we are currently in the accumulation stage just as we’ve seen in many altcoins. The answer depends on what Bitcoin does in the next several days.
Nevertheless, we prepare ourselves for both scenarios so we can appropriately manage risk. In this article, we explore the possible bull and bear scenarios in this sideways trading.
🍁Bullish Scenario: Establish a Higher Low🍁
On our December 19, 2018 Bitcoin update, we showed how Bitcoin can go back to $5,800 levels through an inverse head and shoulders breakout. This is still in play even after yesterday’s drop. However, bulls must hold $3,500 to keep the market’s newfound momentum alive.
BTC/USD 4-hour chart
The good news is that Bitcoin looks ripe for a rally. The RSI on the 4-hour chart is extremely oversold. On top of that, one 4H candle has a long wick below the body to indicate rejection of lower prices. Lastly, the chart has successfully flipped $3,500 resistance into support yesterday when it rejected lower prices.
If the new support can hold for a few days, then a bullish higher low might be in place. This should embolden those who are staying on the sidelines to finally jump in. When they do, Bitcoin might just take out the range high of $4,200 and break out of an inverse head and shoulders pattern.
Projected bullish scenario
For this to happen, Bitcoin must ignite a strong rally with heavy volume in the next few days. Failure to do so increases the risk of dropping to the range low of $3,200 and seeing our bearish scenario play out.
🍁Bearish Scenario: Break Out from Bearish Continuation🍁
Should Bitcoin fail to hold $3,500, the road down to $3,200 support becomes wide open. While a possible double bottom structure may be in play, chances are, the market will turn extremely bearish. That’s because a breach of $3,500 may be interpreted as a break out from a bear pennant.
Projected bearish scenario
The thought of a break below $3,200 can be scary, especially to retail investors. Just as Bitcoin was showing signs of stability or even strength, the threat of new bear market lows looms. For this scenario to play out, Bitcoin must:
👉break below $3,500 and revisit $3,200
👉bounce from $3,200
👉flip $3,500 support into resistance
If the market follows this script, consider selling positions after Bitcoin flips $3,500 support into resistance. This should help protect your capital from further downside risks.
🍁Bottom Line🍁
While it is easy to point out that Bitcoin is currently trading sideways, it is much harder to identify whether the market is in an accumulation or consolidation period. Thus, it is better to plan ahead and be prepared for both scenarios. This is one of the best ways to “out-trade” the herd.