A bullish setup for the bitcoin hodlers out there

• Bitcoin has rebounded impressively this week, generating a potential bullish signal
• Candlestick and chart patterns have provided accurate signals recently
• It’s been heavily influenced by riskier asset classes which in turn have been influenced by sentiment on the USD economic outlook

What. A. Turnaround.

Look at bitcoin’s latest weekly candle. Yes, it’s incomplete, but what a turnaround from where we were on Monday. As of the time of writing, it’s a big bullish pin. Unless we see a major reversal today, that’s a strong signal that we may see further upside ahead.

I say this because when you look at the price action, so many patterns on the weekly timeframe have provided reliable signals this year: the evening star after the record highs in March. The morning star in early July. The bullish engulfing in May. The bearish engulfing candles in June and late July – they’ve been trustworthy even if they weren’t sustained for long. Who’s to say this will be any different?

More to come for bitcoin?

Sitting in a bullish flag pattern, the magnitude of the rebound makes me wonder whether we may see a retest of downtrend resistance soon? And if the price manages to take out $70000 – the high struck in late July – it will break the sequence of lower lows dating back to when the record high was set, pointing to a possible retest of the level should the breakout stick.

Granted, a lot of things that need to go right for that scenario to play out. And buying after the massive rebound is not without its dangers, so it would be nice to see the candle completed before considering whether to join in. It would have been ideal to have bought the dip at the start of the week, as I flagged in a trade idea at the time.

Should bitcoin close above $60,000 I’d feel comfortable entering a long position, not only because it would maintain the bullish signal but also because it found buyers below the level earlier in the year. Risk management is key in these whippy markets, so make sure you place an appropriate stop depending on your end target, be it the top of the flag, $70,000, or moon!

Bitcoin a measure of US economy sentiment?

As for key market drivers, bitcoin remains a high beta play on boarder risk assets which in turn are being influenced by sentiment towards the US economic outlook.

The rolling daily correlation with year-ahead Fed rate cut expectations, US two-year Treasury yields, S&P 500 futures and USD/JPY has been 0.78 or higher over the past fortnight. That suggests that to improve the prospects of the trade, incoming economic data needs to build confidence in the soft economic landing narrative.

Looking at the calendar, US producer and consumer price inflation data for July on Tuesday and Wednesday respectively, along with retail sales, jobless claims and industrial production figures on Thursday, loom as the events most likely to alter sentiment regarding the US economic outlook.

-- Written by David Scutt

Follow David on Twitter @scutty