The bitcoin price dropped more than 8 percent on a 24-hour adjusted timeframe.
The cryptocurrency is attempting a pullback from a historically strong support area above $3,550.
Further breakdown action could lead to a double bottom scenario.
The bitcoin price on Thursday plunged more than 8 percent across the Asian and European trading session, according to aggregated market data at CoinMarketCap.com.
The BTC/USD pair is trading at $3,635 on Coinbase at press time, up 2.7 percent from its session low at $3,556. It formed an inverse relationship with the US dollar, which appeared stronger owing to favorable macroeconomic fundamentals. The US Dollar Index, which measures the US dollar with six leading global fiat currencies, rose by 0.34 percent to 95.11 after dropping to a three-month low.
The bitcoin price has broken below its bearish pennant formation. The pennant’s dotted blue trendline represented as (B) indicates the failed support, while the upper trendline (A) is still looking strong as the session resistance.
There are now two possible price actions left for bitcoin from here: either it could attempt a pullback or could further extend its downtrend. Let’s discuss the first scenario first.
In our opinion, bitcoin is trading inside a false breakout area. There are six separate instances whereby this area had proven to be decent support and resistance (depending on the direction of the trend). The small square boxes in blue indicate how bitcoin price has tested the area between $3,556 and $3,652 before. During a majority of the sessions, traders have treated the range as a signal to purchase.
The most recent purchasing action can be seen in squares (5) and (6). The price action between Dec. 24 and Dec. 27 also reflects a similar trading sentiment.
Therefore, just because bitcoin has broken below (B) does not mean that it will extend its bearish momentum. The cryptocurrency might see a throwback to push the price inside a medium-term sideways consolidation area defined by $4,000 as resistance and $3,652 as support.
An extended breakdown action could lead bitcoin near its temporary bottom area above $3,110, forming a double bottom. Earlier, analysts have predicted that bitcoin will break below the bottom area to establish fresh lows towards $2,500. From the technical perspective, a double bottom scenario has more likelihood to reverse a trend than to extend it. Generally, the longer duration between the two bottoms would ensure more probability of a bounce back.
The selling action has modified our intraday targets per the new range, which is defined by $3,555 as our interim support and $3,686 as our interim resistance.
We will begin the day by opening a short order towards the support while maintaining a stop loss position 1-pip above the entry position. On a bounce back from or ahead of support, we will open a long position towards $3,686 while maintaining a stop just 1-pip below the entry point.
In the event of a breakdown, such that bitcoin breaks below the interim support level, we will open a short order towards $3,369. A stop-loss at $3,565 would minimize our risks in case the price action reverses. Similarly, a break above $3,686 would have us enter a long position towards $3,817, our upside target. A stop-loss order at $3,676, meanwhile, will protect us from potential interim bias switching.
Featured Image from Shutterstock. Charts from TradingView.