A head & shoulders continuation pattern has formed on the hourly chart, offering a possible opportunity to buy if BTC breaks through the blue dotted neckline, or to go short if the price is rejected by the neckline.
This is a continuation pattern because it is contained with the larger bull flag pattern (shown by the two long sloping horizontal lines). It is a 'bull' flag because such a pattern usually resolves itself to the upside and would continue the bull run that started earlier this year.
The dilemma for traders, IF the price breaks upwards through the neckline, is whether to hold BTCUSD in anticipation of the big breakout upwards through the top of the bull flag. OR whether they should sell at the top neckline in anticipation of a swing back downwards as part of the bull flag.
It's always tempting in these situations to sell when the price reaches the top blue dotted line, and then wait to see if the price breaks out above the line, in which case you may be able to quickly buy in again before the price rises too much. Every option involves risk.
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I bought the breakout, as planned. It's a bit of a weak breakout so far but I'm well into profit at the moment so I'll see how it goes...
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The breakout was looking too weak for comfort, so I sold close to 11,000, took my profit and am now watching the retest of the breakout line to see whether the price can stay on the right side of the line. If it can, I may try a long re-entry.
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Retest failed. End of pattern. Well I can't complain - I made money from the breakout before it reversed itself. Now we just have to wait for the next pattern to emerge.
I expect a buy at 10000-10200, my indicator asked me to short:
GlenGoodman
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@go8686, thanks for sharing. Your indicator looks very interesting. Have you backtested it across multiple assets, and if so can I see the results? Thanks!
go8686
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@GlenGoodman, Thank you! The indicator is still under developing, you are welcome to try and test it. It works well in Bitcoin.
Harry_Seldon
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You love those H&S patterns don't you ? :)
I'll try trading on your idea, looks neat.
According to my own theory (ref=my article on the current cycle) , we should continue sideways and not break the top neckline, so to answer your open question, I would sell !
And no problem with being wrong, so I'd buy back after if it broke :)
Thanks Glen.
GlenGoodman
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@Harry_Seldon, Haha yes I love a good head and shoulders. Some academic studies (as referenced in my book) have identified it as the most reliable chart pattern of all. Though a horizontal neckline tends to improve the reliability.
Harry_Seldon
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@GlenGoodman, I've read your comment and thought about it this afternoon. Do you have any input into why these H&S patterns work ? Do they translate the crowd's psychology ? Succession of hope and doubt ? Sorry but I'm curious, and never satisfied with just "it's statistically verified" :)
GlenGoodman
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@Harry_Seldon, I'm the other way round! When I ask people what makes them think Fib levels work, sometimes they tell me it's the result of psychology - self-fulfilling prophecy because of people knowing about those particular levels, which makes them psychologically significant price levels. But that's not enough for me so I search for statistical proof that you can build a profitable system that trades off fib levels, and so far I've found.....nothing. No decent evidence for their validity whatsoever. But I remain open to any backtested evidence anyone can point me to...
As for the head & shoulders, they reflect the process of distribution (h&s top) or accumulation (h&s bottom) by wealthy buyers/sellers. A proper h&s will usually have much higher volume on the first shoulder than on the second shoulder. As you can see on my chart, that was indeed the case with this h&s. It may have worked something like this:
A wealthy seller had a lot of Bitcoin to offload, but in doing so, he/she caused the price to spike down strongly (first shoulder). So he took his foot off the gas and allowed the price to start rising again so he could get a better price. Once the price reached the neckline, he started selling again, with renewed vigour causing a big decline to the head, with even bigger volume, as he sold the last of his Bitcoin, along with short-sellers who were joining in. Once his Bitcoin was all sold, the selling pressure relented and the price started to rise again. Once it reached the neckline, frustrated shorters - still convinced that the head was just the start of massive decline - gave the selling one final attempt, but without the big sellers to help them, volume is weak and the price decline shallow. So the price meanders back up to the neckline, the short-sellers give up the ghost and the stage is set for a breakout to the upside.
Hope that helps!
Harry_Seldon
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@GlenGoodman, That helps indeed :)
It all comes down -again- to "whales" influencing the price then.
Very interesting Glen, thank you.
GlenGoodman
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@Harry_Seldon, no probs, Harry. Though I should add that is just the traditional view of how it works. It is a bit odd that the new crypto markets quickly started producing the same patterns as have been seen in stock markets for centuries. Either the whales were stock market operators who moved over to crypto and performed the same operations here, or consistent human nature caused the newly minted whales to behave in the same ways as old-school stock market barons.
Harry_Seldon
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@GlenGoodman, Oh I've wondered about that too. I could add that it also only comes down to two things : prices only have two directions, and the laws of supply and demand are universal.
I'm a big fan of History, and I've always been amazed by how much our societies and politics are so similar with those of the antiquity for instance. Our societies have evolved a lot, but we humans have not :)