Overview:

Bitcoin continues to consolidate within a tight channel after the swift selloff that caught the market by surprise.  Even with the alt coin market continuing to be punished Bitcoin is has not continued lower, at least not yet.

The challenge with such extreme and ugly selloffs is they reverse only to fail at resistance and move lower.  Currently the structure is still bearish and setting up for a bearish continuation.

Yet markets often surprise us so in lieu of guessing the future direction in the shorter term, we can look for evidence of a broader move.  Let’s take a look at two patterns we are looking at to provide evidence of a future bullish move.

Bitcoin Daily:

Consolidation continues to tighten forming a typical wedge or pennant type pattern.  These types of patterns often result in a breakout in one direction or the other.  They are often subject to pullbacks and throwback either faking out the bulls or taking out the bears.

Keep in mind there are multiple scenarios we are looking at, and these two are just examples of numerous others. Support still remains in the 5867 to 6000 area and initial resistance is at 6610. 

Bitcoin Short Interest:

 

Looking at the flow of money, selling started during the initial pullback which caught long swing traders, buying into a high.  This resulted in new longs exiting along with additional short sellers piling in.

The perfect storm of late buyers and those that had trades from lower levels exiting trades.  Add to this sellers shorting the market into a selloff and the market fell apart quickly.  Late shorts entered the market for two days pushing Bitcoin down to the initial support zone.

This pushes money quickly to the sidelines.  On the 8th, shorts started covering their positions bringing borrowed money back into the market.  Since then the market has simply been consolidating.

Put Yourself in Short Shoes:

Often I paper trade the opposite side of the trade.  This is not the same as actually having money in a trade, but I look at it as if I was making it none the less.

If I was short from the 7300 area I would have likely locked in some of my profits now.  This is evident with the decrease in short positions; However, it appears from the chart this was only a risk reduction move. Short interest is still betting on lower levels.

I would fee very comfortable right now in a short position from 7300 especially if I covered some of my position.  The chance of a spike to the 7500 level, that does not provide an opportunity to exit, is slim to none. 

Yet like trading long I would be adjusting my stop loss.  Personally the 6650 area would provide some cushion, yet minimize risk.  This is slightly above the resistance level and a level that allows for the noise in the market not to knock me out.

If I was shorting in the 6200-6300 range, my initial target would be 5800-6000.  This is a 200-300 pt move depending where the entry was.  A 300 pt stop would provide a 1:1 RR.  This again puts us at the 6600-6650 area.

There is a valid assumption that there are a lot of stop orders in around the 6650 area.  This is a level to look for Bitcoin to push through, and an area that could bring down the Jenga tower of shorts.  We are nowhere near this level yet so let’s not get to excited.

What to look for:

A breakout to 6610 and subsequent pullback to the 6200-6300 forming a failed low may provide an opportunity for a swing and or position trade.  This may result in short covering and we could see an impulse move to the 7k area forming a failed high.

There is an opportunity to trade a subsequent pullback off a failed low.

The more likely scenario is a move lower testing the previous low between 5580 & 6000.  This also provides an opportunity for a trade setup.  From a psychological point, shorts that entered higher would likely take the opportunity to take the money and run.  This would be my ultimate target area.

The 5800-6000 area has been solid support though many are calling for capitulation into the Crypto Abyss.  Longer term buyers are likely to be attracted to this area, I am one of them.

Summary:

Quality setups are not present everyday in any market.  What we are looking for is Bitcoin to build a structure that is conducive to trading.  Currently the structure we have is still bearish even if we see an impulse move to the 6600 area.

This is a time where we need to let the market settle and find direction.  Like remodeling a house, before we can put the flooring down there needs to be some structure.  There is simply no bullish structure at this time.

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