The recent decline in Bitcoin’s price may be a textbook example of the “breakout and retest” play, a phenomenon that has been observed across various asset classes.
The recent sell-off in the price of Bitcoin (BTC) may be a textbook example of the ‘breakout and retest’ play, a phenomenon that has been observed across various asset classes.
Understanding the Breakout and Retest Play
This phenomenon is rooted in the behavioral aspects of trading and investing. When assets break through long-held resistance levels, they often return to confirm the validity of the breakout. This serves as a test of the strength of the former resistance-turned-support, which can lead to bigger rallies.
A breakout is a technical analysis term referring to a stock's price moving above a significant resistance level, often indicating a potential trend reversal.
A retest occurs when the price returns to this new high or low area before continuing its upward momentum.
This phenomenon helps traders gauge the strength of the trend and make informed decisions.
Studies show that approximately 70% of breakouts are followed by a successful retest, making it a crucial pattern for technical analysts.
A Classic Example: Bitcoin’s Price Slide****
The current price slide in BTC looks like a classic breakout and retest setup that has been known to bring bigger rallies. A similar pattern played out in mid-2020 and in the Japanese 10-year bond yields. In both cases, the breakout and retest produced bigger rallies to new record highs.
Why Does This Happen?
Financial markets, like human behavior, exhibit similar patterns. After a convincing move beyond a long-held resistance, assets typically return to confirm the validity of the breakout. This is because people are generally risk-averse when it comes to securing gains, and traders quickly book profits instead of allowing the winning trade to run wild.
A Failed Retest: What Does It Mean?
However, a failed retest or a lack of a meaningful bounce can indicate underlying weakness that can evolve into a full-blown downtrend. Traders need to note that this is not always the case and that the outcome depends on various market factors.
Examples in Traditional Markets
The breakout and retest phenomenon has been observed in traditional markets as well. For instance, the yield on the 10-year Japanese government bond triggered a double-bottom breakout in January 2024 and revisited the breakout level multiple times before rising to multi-year highs.
Conclusion
The current sell-off in Bitcoin‘s price may be just a healthy retest of the breakout point or the former resistance-turned-support of $73,757 breached in November. If this is indeed the case, it could set the stage for a bigger run higher. However, traders need to remain vigilant and monitor market developments closely to make informed investment decisions.
