After weeks of sideways consolidation, Bitcoin suffered a nasty breakdown from its range and a 10% intraday plunge.
The scenario, however, could potentially be a whats referred to as a “head fake” — that in the coming weeks reverses back to above $31,000. If not, a more sustained downtrend is also possible.
Historic Bollinger Band Tightness Triggers 10% Crypto Crash
Bitcoin price has spent the last several months trading around $29,000, after starting the year off with a strong recovery from lows in January.
The record low volatility caused the BTCUSD 1W Bollinger Bands to reach the tightest in the cryptocurrency’s history. Low volatility phases always bring high volatility phases when they end, so Bitcoin has been like a ticking time bomb ready to explode in one direction or another.
This setup in the Bollinger Bands is called a Squeeze, which is valid after a related tool — Bollinger Band Width — reaches the lowest reading in the last six months. Remember, BTCUSD 1W hit the lowest ever.
The only problem is, once volatility arrived, prices exploded to the downside, causing more mass liquidations than during the FTX collapse. Is this a sign of a return into a bearish market, or could this be something called a “Head Fake?”
Could this be a head fake? | BTCUSD on TradingView.com
Why Bitcoin Could Be Preparing A Head Fake Higher
In John Bollinger’s book Bollinger on Bollinger Bands, he exclaims “Trader’s beware!” “There is a trick to The Squeeze, an odd turning of the wheel that you need to be aware of, the head fake,” Bollinger warns.
“Often as the end of a Squeeze nears, price will stage a short fake-out move, and then abruptly turn and surge in the direction of the emerging trend.”
Could this be what’s unfolding in Bitcoin right now? Later, when discussing how to use the indicator take positions as a breakout system, he revisits the Squeeze.
“Typically what you’ll see is a Squeeze, followed by a band tag, followed in turn by the real move,” Bollinger explains. “Most often this will occur within the bands and you won’t get a breakout signal until after the real move is under way,” he added.
As the chart above shows, Bitcoin remains at a point where a head fake could occur, with price reversing higher to the upper Bollinger Band and closing above it — generating a breakout signal. Bitcoin If Bitcoin continues down, the head fake is invalid. Thus, the next two weeks are critical in determining the “real” emerging trend.
#Bitcoin Bollinger Bands were the tightest ever and have only just started to expand to release volatility
But price went down. And has since paused. What next? A possible “head fake.”
The low volatility state we saw, followed by a return of volatility, is called a “Squeeze.”… pic.twitter.com/aP5ugbdUQd
— Tony "The Bull" (@tonythebullBTC) August 22, 2023