Story by: Omkar Godbole
- Bitcoin’s drop from $7,870 to $7,087 (Wednesday’s low) may turn out to be a bear trap due to falling selling volumes and bear exhaustion indicated on the daily chart.
- A re-test of $7,870 could be in the offing – more so, as the three-day chart is still reporting a bull reversal pattern.
- A UTC close above $7,870 is needed to invalidate lower-highs setup and bolster the short-term bullish case.
- On the downside, $6,847 (as per Bitstamp prices) is the level to beat for the sellers.
Bitcoin has recovered from one-week lows hit earlier on Wednesday and may revisit recent highs in the short-term.
The leading cryptocurrency by market value fell to $7,087 at 08:10 UTC – the lowest level since Nov. 27, according to Bitstamp data. At press time, bitcoin has recovered to $7,220, representing an 8 percent drop from the recent high of $7,870 reached on Nov. 29.
Further, the cryptocurrency has erased nearly 50 percent of the recovery rally from the Nov. 25 low of $6,515 to $7,870.
Essentially, bitcoin has established a lower high at $7,870, signaling a continuation of the sell-off from October highs above $10,300.
Even so, sellers need to observe caution, as the latest pullback lacks volume support and may prove a bear trap, as seen in the chart below.
Bitcoin dived below an ascending trendline on Dec. 1, signaling an end to the corrective bounce
However, the selling volume (red bars) witnessed throughout the price drop from $7,870 to $7,087 has been significantly lower than the buying volume (green bars) seen during bounce from $6,515 to $7,870.
Traders often attribute a low-volume pullback with weak long positions taking profits, rather than bears initiating fresh shorts.
Such dips, therefore, are usually short-lived.
Bitcoin is currently reporting its fifth red daily candle in a row. However, three out of the five carry long tails, representing a rejection of lower prices or bearish exhaustion
The chart also shows a steady decline in selling volumes since Nov. 30.
Hence, bitcoin may soon pick up a bid and challenge $7,550 – the resistance of the trendline connecting the Oct. 26 and Nov. 15 highs – and possibly extend gains to $7,870.
A UTC close above the latter level would invalidate the lower-highs set up and confirm a bullish reversal on the daily chart.
It’s worth noting that the cryptocurrency has already charted a bullish hammer reversal pattern on the three-day chart. That pattern would be invalidated only if prices drop below $6,847.