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 the upward trend of an asset. Traders confirm it when they see three highs forming 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 hero 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 not be underestimated in any case. Bitcoin is moving into zones where a quick reversal and change of direction can more easily establish itself“.
If the H&S pattern is valid, there is a risk that Bitcoin will be about $1,600 below its baseline (the level between the peak and the support). The yellow area in the graph above shows the ideal target area for the H&S breakout.
What risks Bitcoin is exposed to
Prince’s bearish outlook for Bitcoin received involuntary support from the crypto-currency futures market. According to Glassnode, the average „funding rate“ across all Bitcoin exchanges has risen to levels indicating that traders may have been over-leveraged through 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 favour of bulls. This is an overbought situation.
An event of a pullback in 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 whole trend reversal theory altogether.
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.