Do you remember the last time you went on vacation? After locking the door and on your way to your car, you probably turned back suddenly to make sure the lock was secure before you continued your journey.
Financial markets, led by a variety of human emotions, exhibit similar behavior. After a convincing movement in addition to a prolonged resistance, assets typically return to confirm the validity of the outbreak. It acts as a test of the strength of the former resistance-turned support, according to which larger events unfold.
The “Breakout and Retest Play” phenomenon is well known across asset classes. Bitcoin’s (BTC) ongoing sales can be just that healthy gene test of the breakout point or the previously-facing support of $ 73,835 violated in November.
In other words, the downward momentum could run out of steam on or closer to these levels, which potentially sets the stage for a larger race higher.
BTC has dropped over 15% to less than $ 80,000 this month and exposed the previously resistance-facing support to $ 73,835. Prices broke over this level in early November and ended months long consolidation after Pro-Crypto Donald Trump won the US presidential election.
The market’s tendency to retreat or revise the breakout point before staging more huge events has its roots in the behavioral aspects of investment.
People are generally risky when it comes to ensuring gains. So when faced with profits, dealers quickly book them instead of letting the winning trade run wild. The so-called prospectus theory explains why post-breakout events suddenly run out of steam, often leading to a gene test of the breakout point. BTC holders have made a profit around $ 100,000 mark since December.
When prices now get lower and near the breakout point, in this case, $ 73,835, market participants who missed the original rally -jump in, ensuring that the level applies. The resulting jump from the former resistance-facing-supporting is drawing in more and more buyers, potentially giving a bigger rally.
That’s exactly what happened in the third quarter of 2023 and August-September 2020.
On both occasions, breakout and gene test produced larger rallies for new record highs. However, dealers need to note that a failed gene test or lack of meaningful rejection indicates underlying weakness that can develop into a full blow downward.
Over the years, I have seen several examples of gene test of outbreaks/collapse leading to greater movements in traditional markets.
Consider the yield of the 10-year Japanese government bond. It triggered a double-bound breakout in January 2024 and revised the breakout level several times before rising to perennial heights.
Aud/USD pair dive out of a larger support trendline in December and suggested a deeper slide. The couple jumped to the Trendline resistance early this month to only see sharp losses this week.
