Bitcoin (BTC) has gained 36% in two months, offering relief to the battered bulls. However, according to Crypto Twitter, the recovery has suddenly drawn the shape of a bearish pattern on price charts and could be short-lived.
A rising wedge represents a bounce contained between two converging trendlines connecting higher lows and higher highs. The converging nature of trendlines indicates volatility is contracting as prices rise, a sign of recovery losing steam – and that tension is building, with sellers contesting the move higher.
So an occurrence of a rising wedge often has traders preparing for a fresh price drop. Chart-based traders typically take short positions – bets on declines – when prices dive out of the rising wedge, confirming a breakdown. The pseudonymous analyst Nebraskagooner tweeted, "Really not looking hot here after multiple rejections. A rising wedge breakdown would target a $21,500 area."
The predictive power of technical analysis patterns is tied to their popularity, meaning sometimes these patterns can become a self-fulfilling prophecy; the greater the number of people tracing the rising wedge, as is the case with bitcoin, the stronger the probability of a renewed drop.
Bitcoin has yet to dive out of the rising wedge, but if it does there could be renewed selling, as feared by Crypto Twitter. The pattern has also drawn the attention of savvy traders.
"Bitcoin has managed to hold up much better than I thought it might, but the outlook appears to be the same," Michael Kramer, founder of Mott Capital Management, wrote in a market update published Sunday. "A rising wedge pattern is forming within the bear flag pattern, strengthening the case for this fall lower and potential test $16,400."
Macro leans bearish
Macro and fundamental factors can singlehandedly make or break patterns. To the disappointment of bitcoin bulls, macro factors seem to support the case for a wedge breakdown. Analysts at ING expect financial conditions to tighten while heading into the U.S. Federal Reserve's Sept. 20-21 policy meeting.
Financial conditions are determined by the U.S. dollar exchange rate and bond yields. A rising dollar and bond yields mean financial conditions are tightening, a bearish development for liquidity-addicted risk assets like stocks and cryptocurrencies.
"Expect financial conditions to re-tighten in the weeks and months ahead. After all, that's what the Federal Reserve wants and needs," ING analysts wrote in a blog post published Monday. Per ING, U.S. financial conditions were very tight at the end of June, but have considerably loosened since then.
ING analysts added the Fed would be hoping the financial conditions re-tighten, "Otherwise the Fed will be left with the less comfortable position of coaxing tighter financial conditions, whether through the verbal or policy action route."
The U.S. dollar is already on the rise. The dollar index, which tracks the greenback's value against major fiat currencies, neared 107.00 early today, extending the recovery from the past week's low of 104.63.
The yield on the 10-year Treasury note held steady above 2.8%, having put in a low of 2.67% following last Wednesday's soft U.S. Consumer Price Index release. The resilience in the yield suggests traders of risk assets may be wrong to conclude that inflation in the U.S. has peaked and the Federal Reserve will probably slow liquidity tightening in the coming months.