Bitcoin (BTC) has begun the day in green convincing traders and analysts that the Inverse H&S formation might still be valid. If we look at the above chart for BTC/USD, we can see that Bitcoin (BTC) has completed a left shoulder and a head. Now it is supposed to form a right shoulder around the completion of which the price is expected to break above the 21 EMA resistance. If Bitcoin (BTC) rises above $4,200 we can say that it is finally in the clear for further upside. Until yesterday, there was a strong probability that Bitcoin (BTC) may retest the previous low short term. However, that probability has now decreased with the price rebounding strongly off its trend line.

We have seen similar consolidation in the recent past which has led to subsequent crashes. However, this is the first time we are seeing an inverse head and shoulders in the making. This inverse head and shoulders being formed on the 4H chart has a very high probability of playing out. However, the fact that the price is also trading in a bearish pennant at the same time means that we can expect a short term break below the trend line as well. That being said, it would be surprising to see the Inverse H&S get invalidated at this point considering Bitcoin (BTC) has already been through an extensive correction and this is the most opportune way to turn things around. If the bulls fail to avail this opportunity, the price may be trading in this range for a long time even if it does not fall further.

The recent wave of capitulation has effectively destroyed the bullish resolve to the point that the number of shorts on exchanges like Bitfinex and Bitmex are now near an all time high. The bears have become too confident in their positions. The bulls however remain weak and scared. Long positions on exchanges do not show the same confidence as short positions. We did see the bears give up for a while last week when the number of shorts started to fall, but the past few days have made them confident again. For any market to stage a reversal, one side has to lose completely. The bear market has made the sellers complacent same as the bull market made the buyers complacent.

Two things have to happen before a trend reversal. First, the bulls have to lose faith, which they already have. Second, the bears have to get hurt such that they cannot fight back. We are yet to see that happens but considering the number of shorts that have been piling up on Bitfinex and Bitmex, I think we are very close to seeing that happen. The weekly chart for BTC/USD shows that the price has now found a strong support around $3,458. The RSI for the weekly chart sums up the whole story. Around September this year, the RSI broke above a long term resistance. Many took it as a sign of reversal and got trapped. It was followed by capitulation which pulled the RSI even lower than it has been in years. It was a major setback short term but there was a bright side to it: the previous long term resistance became the new support.