It’s been a strange few days in the bitcoin price space. A number of fundamental developments seem to have reversed the negative general sentiment from the beginning of last week, and the bitcoin price looks to reflect this reversal. However, a look at the charts from a technical perspective suggests there could be some medium term weakness. We’ve detailed head and shoulders pattern before, but for our readers that haven’t come across these patterns in our analysis yet, they are a pretty common classical technical charting pattern used in more traditional financial asset trading. They come in two forms, with one being bullish and one bearish, depending upon the way they lie.
When a bearish head and shoulders pattern forms, we see a rise, peak, dip (left shoulder) followed by another rise, higher peak, dip (head) and finally, a repeat of the first part (right shoulder). The price action that underlies the pattern is supposed to represent a weakening of the current momentum, as defined by price failing to make fresh highs following a peak in an bullish pattern and fresh lows following a trough in a bearish pattern (the bearish form is the same as the bullish but upside down).
The way we trade the pattern is wait for completion, as defined by price breaking the neckline, which is the support that joins the troughs before and after the head peak. You can see some examples of this completion here and here.
Getting back to today’s action, we are currently mid way through the European afternoon session on Monday, and are heading into the region around which we would expect the bitcoin price to break the neckline. So, ahead of this breaking and a potential entry, let’s define our key levels, as well as take a look at the potential for a bullish entry if the pattern invalidates. As ever, get a quick look at the chart to get an idea of the numbers in question.
As you can see, the neckline of the pattern sits at 394.9, and this also serves as in term support for today. In term resistance comes in at 402, which is the peak of the two shoulders associated with the pattern.
When trading a head and shoulders, we enter on a close below the neckline with a target the same height as the pattern. This puts our target somewhere in the region of 384-85. A stop loss on the trade at around 398 gives us plenty of room to avoid being chopped out, while still helping us to maintain a positive risk reward profile.
Looking the other way, if the pattern proves invalid and we get a return to the upside momentum we saw pre-formation, we will look for a close above in term resistance at 402 to validate a scalp trade towards pattern top at 406. A tight stop is necessary on this one as it’s a very tight trade – somewhere in the region of 400 flat just about keeps our risk reward positive.
As always, charts courtesy of Trading View