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Bitcoin’s drop from $10,949 to $9,855 (Wednesday low) may be a bear trap, as selling volumes have dropped throughout the price pullback.

A widely-tracked 4-hour chart indicator is reporting a bullish divergence and the daily candlesticks are signaling seller exhaustion. BTC could rise above $10,270, confirming a falling wedge breakout on the 4-hour chart.

A wedge breakout, if confirmed, would open the doors to $10,956 (Aug. 20 high). A UTC close above that level would confirm bull revival.

On the lower side, a high-volume drop below $9,855 could pave way for a deeper drop toward $9,500. Currently, that looks unlikely.

Bitcoin (BTC) has recovered from nine-day lows hit earlier on Wednesday and may pick up a strong bid during the day ahead.

The leading cryptocurrency by market value fell to $9,855 on Bitstamp during the Asian trading hours, the lowest level since Sept. 2. At that level, prices were down 11 percent from Friday’s high of $10,950.

At time of writing, BTC is changing hands around $10,000, representing a 1.9 percent drop on a 24-hour basis.

BTC’s drop into four figures seen earlier today validated the bearish view put forward by BTC’s failed breakout on the hourly chart on Monday.

Further, the daily chart is reporting bearish conditions with a lower-highs setup. The cryptocurrency has also found acceptance below key hourly chart support of $10,060.

Even so, the sellers need to observe caution, as the recent pullback lacks volume support and may prove a bear trap, as seen in the chart below.

4-hour chart

Selling volumes (red bars) have been consistently higher than buying volumes (green bars) through the price pullback from $10,950 to $9,855.

However, the red bars have produced lower highs, meaning the selling volume, or pressure, has eased along with the price.

A low-volume decline is often short-lived and ends up trapping the bears on the wrong side of the market.

Also, the pullback has taken the shape of a falling wedge on the 4-hour chart. A falling wedge comprises of converging trendlines connecting lower highs and lower lows and is widely considered a bullish reversal pattern.

A break above the upper edge of the falling wedge, currently at $10,270, would confirm a breakout and open the doors for re-test of the recent high of $10,949.

The breakout looks likely as the moving average convergence divergence (MACD) histogram, a widely-tracked trend following indicator, is reporting a bullish divergence – higher lows contradicting lower lows on price.

The bullish case would weaken if prices drop below the previous long-tailed candle’s low of $9,855 with a solid rise in selling volumes (red bar breaches falling trendline).

Daily chart

The long tails attached to the previous three candles indicate dip demand near the daily lows or bearish exhaustion – in effect, the sellers fought to keep prices lower, but lost as the buyers pushed the price up.

The daily chart also shows a steady drop in selling volumes in the last five days.

So, BTC may move higher, possibly to levels above $10,270 during the next 24 hours, confirming a breakout on the 4-hour chart.

The outlook as per the daily chart would turn bullish if prices invalidate the bearish lower highs setup with a UTC close above $10,956 (Aug. 20 high).

Disclosure: The author holds no cryptocurrency assets at the time of writing.

Bitcoin image via Shutterstock; charts by Trading View