As I write this, Bitcoin is down about 4,000 points from its late June highs; with the low-water mark being about a 35% drop. The Bears are starting to pick up enthusiasm, and skepticism is starting to rise again after the fleeting optimism of the June rally.
Is it time for the Trap Setup?
The “Trap” occurs during a primary Bull trend when we have an intermediate pullback which usually causes a short-term downtrend. We can see this example in the Bitcoin chart from early June:
At this point everyone assumes that the price will break the lows into a new “lower low” since that has been the trend for a couple of weeks, however don’t forget that the LARGER TIMEFRAME trend (the weekly chart) is still pulling higher:
The “Trap” has been set and is now sprung, as the price “traps” those weak-hand shorts into capitulation:
Why Does This Work? What Causes It?
There are several reasons why the Trap play works, and most of them fall under my “Four Major Rules” that I teach in the Fractal Energy Trading class:
- Larger Timeframes Dominate the Trend – The Weekly chart uptrend is still “in charge” and will eventually cause any smaller-timeframe counter-trend to revert back to the mean.
- Reversals Start From the Inside-Out and Propagate Higher – an intraday timeframe like the hourly or five-hour chart will actually precede the daily chart reversal, and when the Daily chart puts in that “higher low” and follows it with a “higher high,” it’s all over for the bears.
- Descending Trendlines Break to the Upside – a trendline drawn that connects all of the recent “lower highs” will be broken to the upside when the daily chart starts the reversal process. This is nothing more than an anchor or “checkpoint” but is useful to see in action when you believe that the reversal back to the weekly chart trend is occurring.
- Range Contraction Leads to Range Expansion – This is just a normal cycle, and the counter-trend daily chart trend is just an expression of the Weekly chart “recharging” as it works off the latest uptrend.
As we apply these four rules to today’s chart:
We see that 1) the weekly chart is still in a primary uptrend, 2) the daily chart is in a primary downtrend, but could be in position to print a higher low soon, 3) a clear set of “lower highs” is available to draw a descending trendline which could be broken to verify the reversal, and 4) This current move is “range contraction” on the weekly chart which translates into a mild, choppy downtrend on the daily chart.
We’re not here to predict the future, but be aware of the possibility of a potential Trap play on Bitcoin in the near future, if the price prints a “low” higher than 9080, and breaks above $11k.