Bitcoin: Sluggish Sell Off Setting Up For Short Squeeze?

Based on our swing trade strategy, a buy signal was generated on 9/30 at 8425. Since then, there has been no follow through which is not all that surprising in this environment. By recognizing bearish momentum still has greater control, we were careful to compensate for the elevated risk by taking a smaller position. Now we have two simple choices: exit the long early for a small loss, or continue to give Bitcoin a chance to find a new round of buyers. In this article I will explain our adjusted outlook and why we continue to give this trade a chance. The aim is to provide a glimpse into our decision making process and a technical point of reference to compare to your evaluation.

1. Price continues to fluctuate below the 8500 level (50% retrace of the 3150 low to 14K high). This is a lower high formation which continues to favor bearish momentum. This structure is beginning to lose credibility because price is NOT probing new lows yet.

2. The 7600 region continues to hold price up with the development of a minor double bottom formation off the the low 7700s. This is the basis for our swing trade long. The lows of the formation have YET to be taken out.

3. Long tails have appeared along the previous few candles since the minor bearish retrace has been in play. This is a clear sign that buyers are absorbing any supply that is over reacting to price noise on smaller time frames. We interpret this lack of bearish momentum as a subtle sign of strength (as long as the 7600 level is not compromised).

4. If price breaks the 7600 level, the next relevant support region is the 7275 to 5400 area. Again, this does NOT mean price will make it that low, but it does point to a greater chance of a broad bullish reversal forming around such a location. This is particularly attractive for position traders (investors).

5. The 7500 level is a high probability fake out area relative to the swing from 7700 to 8500. If a pin bar appears around this location, we will be open to taking a new aggressive long swing trade. Such moves are notorious for luring capital from those who focus on small time frames. These same participants provide the momentum and liquidity for the next leg higher (short squeeze).

Keep in mind, these observations are relative to larger time frame strategies like swing trading. We do NOT short Bitcoin, even in the face of a bearish trend and we DO NOT consider time frames less than 12 hrs. These are rules that guide what information shapes our decision making process. Without such rules, we would be reactive rather than prepared for particular scenarios (market alignment).

Our decisions are usually made around the open of the new candle at 8 PM EDT. The reason is simple: once the previous candle is closed, we have a much better idea of what to expect next. If Bitcoin cannot bounce over the next 5 hours, we will most likely close our position and lock in a smaller loss (since our stop is much lower).

You don't have to been in every move to generate a consistent return, you don't have to have a high win rate, and you don't have to hit home runs. Performance consistency for any strategy or market is a product of your process. A process is a set of guidelines and rules that exist to remove emotional decision making and filter market information in order to better recognize QUALITY opportunities. In terms of swing trades, these opportunities or setups are infrequent (maybe 2 - 3 per month in this environment for Bitcoin).

These rules must come from you because they need to be in line with your goals and risk tolerance. Buying or selling Bitcoin because someone else says so or because some line crosses another line on your 3 minute chart is NOT a well defined process. It begins with first, knowing your time frame, second, maintaining a focus only on information that is relevant to that time frame, and third, having a strictly defined technical setup to consider. From there you need to be able to evaluate this information against what is unfolding at the moment. The goal is NOT to make money, it is to minimize randomness and risk. Profit is the biproduct of a well defined process and flexible perspective.