Bitcoin (BTC) has gained 36% in two months, offering relief to battered bulls. However, according to Crypto Twitter, the rally has suddenly drawn the shape of a bearish setup on the price charts and may be short-lived.
“BTC is consolidating inside a rising wedge, which is a bearish pattern,” technical analysis enthusiast Milan Vojtek tweeted early Tuesday, echoing the sentiment of his compatriots on Twitter.
A rising wedge represents a contained bounce between two converging trend lines connecting lower lows and higher highs. The converging nature of the trendlines indicates that volatility is contracting as prices rise, a sign that the recovery is running out of steam – and tension is mounting as sellers challenge the upside.
Thus, the appearance of a rising wedge often causes traders to brace for a further decline in price. Chart-based traders typically take short positions – bets on the dips – when prices dip off the rising wedge, confirming a breakout. The analyst handle Nebraskagooner tweeted: “Really nothing to get excited about here after multiple rejections. A breakout of the rising wedge would target an area of $21,500. »
The predictive power of technical analysis patterns is linked to their popularity, which means that these patterns can sometimes become a self-fulfilling prophecy; the more people plotting the rising wedge, as is the case with bitcoin, the greater the likelihood of further decline.
Bitcoin continues to move in a rising wedge, a bearish pattern. (TrendSpider, Milan Vojtek)
Bitcoin has yet to break out of its rising wedge, but if it does, there could be a resurgence in selling, as Crypto Twitter fears. The setup also caught the attention of savvy traders.
“Bitcoin has managed to hold up much better than I expected, but the outlook appears to be the same,” wrote Michael Kramer, founder of Mott Capital Management, in a market update published Sunday. “A rising wedge pattern is forming inside the bearish flag pattern, strengthening the case for this lower drop and potential test of $16,400. »
Macro and fundamental factors alone can make or break patterns. Much to the disappointment of bitcoin bulls, macro factors appear to support the wedge breakout hypothesis. ING analysts expect financial conditions to tighten ahead of the US Federal Reserve’s September 20-21 policy meeting.
Financial terms are determined by the US dollar exchange rate and bond yields. A rising dollar and bond yields means financial conditions are tightening, a bearish move for risky cash-addicted assets like stocks and cryptocurrencies.
“Expect financial conditions to tighten in the weeks and months ahead. After all, this is what the Federal Reserve wants and needs,” ING analysts wrote in a blog post on Monday. According to ING, US financial conditions were very tight at the end of June, but have since eased considerably.
ING analysts add that the Fed is hoping for financial conditions to tighten, “otherwise the Fed will find itself in the less comfortable position of pushing for a tightening of financial conditions, whether verbally or through policy action.” “.
The US dollar is already on the rise. The dollar index, which tracks the value of the greenback against major fiat currencies, approached 107.00 early in the day, extending the rally from last week’s low of 104.63.
The yield on 10-year Treasuries held above 2.8%, after hitting a low of 2.67% following the release of the US consumer price index on Wednesday last. The resistance in the yield suggests that traders of risk assets may be wrong to conclude that inflation in the United States has peaked and that the Federal Reserve is likely to slow the tightening of liquidity in the months ahead.
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