Bitcoin: Is a 'Retest' in the Cards?

There is no doubting the strength of bitcoin, whose legitimacy only grows stronger with each passing day. It has been years since Wall Street titans referred to it as a “fraud,” “ponzi,” or “tulip bulbs.”

Proof is in the performance. Bitcoin gained 570% from its prior cycle lows in November 2022 to last week’s high (25 months). In the last four months alone, bitcoin is up 111%. Most importantly, its 50.2% gain over the prior five weeks since the U.S. election triggered a bullish breakout from a large, 3½-year consolidation pattern. Given the size of the consolidation range ($53,000), traditional technical analysis projects a minimum measured move towards the ~$120k level. At a recent industry conference of chartered market technicians, one respected panelist said his analysis projects a move above $200,000. Those projections are conservative relative to others on the major financial networks whose longer-term targets are in the millions.

Bitcoin (Monthly Period)

When discussing price, time horizon is crucial. Even the strongest performing uptrends for any security will experience corrective price action based on many factors. Simply put, not all investors are the same. There are different pools of capital, strategies, time frames, risk tolerance, volatility, hedging, etc., all which impact price and contribute to what makes a market.

While bitcoin is clearly in a bullish uptrend with new all-time highs reached in the last week, there are technical reasons suggesting a near term reversal could be in the cards.   

First and foremost, it is common technical price action for securities to correct backwards and “retest” a previous breakout level which for bitcoin would be around ~$70,000. While a typical retest is rarely down 30%, as is $70,000 versus last week’s high of $104,000, bitcoin is not your typical security. During its 144% YTD gain as of last week’s high, bitcoin corrected 33% from March through July. It certainly does not have to retest, but over the longer-term horizon it would not be bearish if it did. If anything, a prior 3½-year resistance level being tested from above would widely be viewed as strong support and a potential entry point for cash on the sideline.

Fibonacci

While bitcoin is known for its explosive bullish gains, in its short life cycle it has gone through five downtrends greater than 70%. Most recently, bitcoin declined 78% from November 2021 to November 2022. Using closing prices on a daily period time frame, the 161.8% Fibonacci Retracement of this downtrend is $99,933, which is within 0.6% of this week’s closing high. The 161.8% fib is a common projection level where securities can set their cycle high.    

Bitcoin (daily period)

If a deeper pullback is in store, the prior breakout level around ~$70,000 correlates to the prior two-year uptrend. Relative to the 570% gain from November 2022 through December 2024, the 38.2% Fibonacci retracement is $68,121 and within 0.6% of its 2021 cycle high, $67,734.    

Bitcoin (daily period, 2020 – 2024)

Candlesticks

Candlestick patterns can reveal signs of exhaustion or investor uncertainty, which, like many forms of technical analysis, repeat over time and can signal a change of trend is in store. At the very least, candlesticks help identify price levels to measure risk.    

Two weeks ago, bitcoin closed near the top of its weekly range; however, its “hanging man” candlestick pattern, taking place within the prior week’s high/low range ($99,728 - $88,742; yellow lines), denotes uncertainty and a possible change in trend. Similarly, last week’s “spinning top” pattern also denotes uncertainty and potential for a change in trend. 

Bitcoin (weekly period)

Round Numbers

While bitcoin reached new closing highs in the last week, not bearish, for the fourth consecutive day it is battling with the $100,000 level. Round numbers often lead to a concentration of buy and sell orders, which in turn can create significant support and resistance on the charts leading to potential price reversals.     

Seasonality

December seasonality is not as favorable for bitcoin like it is for equities, as represented by the S&P 500. Over the last ten years ending 2023, December has an average return of 5.2% and is only the eighth best-performing month on average. In this small sample of ten, it has been positive only 50% of the time, including lower in four of the five prior Decembers (2018 – 2023). The five positive Decembers have an average return of 30%, while the five down have an average decline of 10.4%. January ranks tenth with an average return of 1% and is positive only 50% of the time.

Momentum

Momentum measures are elevated with the daily RSI, now 69, reaching a high of 84 in mid-November, while the weekly RSI finished at 78 last week.  Overbought readings are obviously reflective of bullish price action and can certainly become even more overbought, particularly so for bitcoin. However, the elevated measures are noteworthy amidst the clustering of other technical indicators.

Time will tell how the near to intermediate term price action plays out. However, the case can be made that the parabolic 50% gain over the prior five weeks, or 570% gain over the prior two years, is due for a period of consolidation.