Bitcoin's Reversal: A Story of Emotions
Updated
Clearly Bitcoin's bears are having a crisis of confidence. Throughout this possible Inverted Head & Shoulders, they've been through a range of extreme emotions that have likely decimated their accounts. Head & Shoulders are distribution patterns that represent the distribution of control from bears to bulls or from bulls to bears. This inverted one has left the bears in a very weak position, and now, as this possible right shoulder is forming, they're beginning to wonder whether to become bull. No one really knows why a Head & Shoulders pattern looks the way it does, but looking at it through the lens of emotion can give us some insight, teach us how not to trade, and how to feel after the pattern has concluded.
Left Shoulder: Confidence
Bitcoin's drop to what is now the left shoulder was surprisingly deep. The $6,850 support zone was already on my chart weeks before, and it was the bluest blue support at the time. Yet the bears managed to break it down, and even the next strong support close by. This gave the bears an extreme amount of confidence. Confidence, however, is a dangerous thing. The bulls managed to pullback straight back to $6,850, the support that the bears fought so hard to turn into a resistance, now the reddest red resistance on my chart, forming the left shoulder.
Head: Euphoria
For the bears to not only succeed in breaking down $6,850, but to take down yet another pullback, and then to create an entirely new low for this year at $5,750 is quite a feat. Their confidence was only magnified into euphoria by this success. But if there's nothing more dangerous than confidence, it's euphoria. This left the bears in a position of complacency. They were assuming $5,000, but their dreams were swiftly torn away as the bulls defended $5,750 twice, and yet again pulled us back to the $6,850 resistance, putting the bears in crisis mode.
Right Shoulder: Hope/Fear[/I]
Managing to defend the $6,850 resistance for the second time probably felt like of sigh of relief for the bears, and gave them the most dangerous and vulnerable emotion possible: hope. However, extreme emotions in one direction can easily become extreme emotions in the other direction. The bears only need to slightest disturbance from their hope to become fearful. And if it's any emotion that creates extreme price movements, it's fear.
The Reversal: Capitulation[/I]
Bitcoin is slowly curling back up, possibly forming the right shoulder. This is possibly indicative of control distributing toward the bulls. The bears could not bring the price lower than they hoped, and now their hope could slowly be turning into fear. The higher we go, the more fearful they could become. If we reach close to $6,850, this is clearly not just a small pullback, so we can invalidate our Ghost Shoulder and Bruce Willis scenario. This will be the bears at their most fearful, and begin to exit their positions en masse as their fear turns to capitulation.
How Not to Trade Like the Herd[/I]
The bears' struggles throughout this Inverse H&S have clearly shown that extreme emotions are dangerous. So I pose this question to the bulls: How will you feel if we reverse? Will that confidence turn to euphoria? Will any defense of a pullback turn to hope? Part of trading is managing your emotions. This stops you from becoming complacent and following the herd. It also allows you to hold your biases lightly, admit when you're wrong, and enter or exit a trade accordingly. Seeing the valuation of your account go up after entering a position is only half of an emotion. The emotion is only complete until after you exit that position, not before. Catching a reversal is the best trade you could make, don't squander it by over exaggerating incomplete emotions.
Left Shoulder: Confidence
Bitcoin's drop to what is now the left shoulder was surprisingly deep. The $6,850 support zone was already on my chart weeks before, and it was the bluest blue support at the time. Yet the bears managed to break it down, and even the next strong support close by. This gave the bears an extreme amount of confidence. Confidence, however, is a dangerous thing. The bulls managed to pullback straight back to $6,850, the support that the bears fought so hard to turn into a resistance, now the reddest red resistance on my chart, forming the left shoulder.
Head: Euphoria
For the bears to not only succeed in breaking down $6,850, but to take down yet another pullback, and then to create an entirely new low for this year at $5,750 is quite a feat. Their confidence was only magnified into euphoria by this success. But if there's nothing more dangerous than confidence, it's euphoria. This left the bears in a position of complacency. They were assuming $5,000, but their dreams were swiftly torn away as the bulls defended $5,750 twice, and yet again pulled us back to the $6,850 resistance, putting the bears in crisis mode.
Right Shoulder: Hope/Fear[/I]
Managing to defend the $6,850 resistance for the second time probably felt like of sigh of relief for the bears, and gave them the most dangerous and vulnerable emotion possible: hope. However, extreme emotions in one direction can easily become extreme emotions in the other direction. The bears only need to slightest disturbance from their hope to become fearful. And if it's any emotion that creates extreme price movements, it's fear.
The Reversal: Capitulation[/I]
Bitcoin is slowly curling back up, possibly forming the right shoulder. This is possibly indicative of control distributing toward the bulls. The bears could not bring the price lower than they hoped, and now their hope could slowly be turning into fear. The higher we go, the more fearful they could become. If we reach close to $6,850, this is clearly not just a small pullback, so we can invalidate our Ghost Shoulder and Bruce Willis scenario. This will be the bears at their most fearful, and begin to exit their positions en masse as their fear turns to capitulation.
How Not to Trade Like the Herd[/I]
The bears' struggles throughout this Inverse H&S have clearly shown that extreme emotions are dangerous. So I pose this question to the bulls: How will you feel if we reverse? Will that confidence turn to euphoria? Will any defense of a pullback turn to hope? Part of trading is managing your emotions. This stops you from becoming complacent and following the herd. It also allows you to hold your biases lightly, admit when you're wrong, and enter or exit a trade accordingly. Seeing the valuation of your account go up after entering a position is only half of an emotion. The emotion is only complete until after you exit that position, not before. Catching a reversal is the best trade you could make, don't squander it by over exaggerating incomplete emotions.
Note
So if you're wondering what fearful bears look like, you're seeing that play out right now. I think we can safely invalidate the Ghost Shoulder now, as this is obviously the true left shoulder forming. Just remember that there is no guarantee that the bears' fear will become capitulation at the neckline, however reliable this pattern type is. But at this point we can begin to set some targets above the neckline in preparation for the reversal. I will post my targets tonight or tomorrow. Just remember to limit your excitement and not let it become confidence.Note
Posted some provisional targets in a reply to Sharky1972 below.
Note
If you don't know it by now, we now have a validated reversal. We broke the neckline with high volume, and we seem to be following my provisional targets so far. The bears are now bulls, so we should start moving two steps forward and one step back.If you're amazed by the timing of the lines on my chart, I assure you that they were purely coincidental. Just wanted to fit everything on my computer's display. One thing you should always expect from me is modesty. TradingView has enough blow-hards that will be saying, "I told you so!" If a trader boasts about being right, they don't have the right mindset to be a successful trader. This is not a game about being right. This is a game about being less wrong. So now let's see how much less wrong we can become.
New analysis to come.
Note
Sorry, I don't have any confidence in a new analysis until there's more information. This reversal looks too bullish, and I want to wait until tomorrow to see how things play out. If you want some more ironed out targets, here they are:Strong support: $6,850
Support: $7,100
Resistance: $7,380
Strong resistance: $7,780
Strongest resistance: $7,900
Euphorically strong resistance: $8,000
If we get to these untouched resistances before my next analysis, use the Goldilocks price guide: not too ideal, not too aggressive. I think $7,900 and $8,000 are too ideal. That leaves $7,780 as our final target before a significant pullback. But if $7,780 is broken anytime soon, as unlikely as that is, it's better to be patient after that. I'll be waiting for more information. Rest assured that tomorrow will be small movements at our new top as we consolidate in preparation for our new landscape. Stay safe.
Note
Just an update for the shaky hands and those haven’t locked in any profits, I don’t expect the significant retracement until we reach $6,780. What we’re seeing now are bulls simply securing their profits, which isn’t trend altering, just makes things noisy. Patience!Note
Oops, $7,780. So used to being in the $6,000’s!
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