Well, as we suspected, there was something of a tussle between $365 and the previous high, but on this occasion we powered through. Hurrah!
Here's how it looks on the chart:
What I'd like to draw you attention to today is the pull-back that follows. Do you see how having made a good run beyond resistance, the market pulls back to the top of the resistance box that we sketched on the chart back on Tuesday - almost to the dollar - before rejecting it.
This is a very common reaction following a significant breakout and it occurs as the result of a combination of phenomena - and it's worth spending a moment to discuss them:
The initial drive above resistance triggers both the stop loss orders of short traders wishing to minimise their losses and the buy stop orders of breakout traders keen to catch the breakout. Once the market has absorbed the impact of this positive order flow, momentum wanes and then reverses as short term momentum traders begin to take profits off the table, Once supply tips demand, everyone starts watching the previous resistance line, short term bears to take profit and new bulls to hop in at a wholesale price.
In this case this combination of short buyers closing and new buyers joining creates a new positive order flow which is powerful enough to reverse the temporary dip and in the process, serving to confirm to the bulls that the breakout is solid, more and more pile into new long positions as a result, feeding the positive order flow and confirming the breakout.
From a personal perspective, I always like to enter long on a confirmation pattern like we see here, rather than the initial breakout. This is because, statistically, the win percentage is far higher than trading the initial breakout.
Now, I accept that while some of you will have found this diatribe interesting (watching mass psychology play out before my eyes has always fascinated me) I do appreciate that others will be aching for me to get to the bit they are interested in - ie what happens next. Forgive me. Let's do that.
Well, what we can say already is that the market looks like it is confirming the breakout and on this basis we can be reasonably confident of fresh highs in the near term. I will feel more confident still once we have taken out the high of the day but as always in trading, once you are sure the potential to profit has evaporated...
Overall, almost everyone should be feeling relatively comfortable; short term traders because your breakout trades are in the black and investors because life is just getting better and better. I say almost because there are traders out there who have been trying to time a market turn to the downside in Bitcoin. Think about it, for you to be able to buy a Bitcoin, somebody has to be prepared to sell it to you. And they wouldn't do this unless they disputed your opinion that the market would keep rising, right?! And how crazy is that?!
Crazy it may be but its worth remembering, whenever you are sure that your trading decision is right, that there is a perfectly rational human being on the other side of that trade, and their view is the exact opposite of yours...
And I'll leave you with that thought to ponder...
Toodle pip,
Rob @ BitScan
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