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Bitcoin's drop to three-week lows has bolstered the bearish setup and opened the doors for a re-test of November lows near $6,500.

A drop to $6,500 could trigger a long squeeze, yielding a deeper drop in prices. However, bitcoin long positions have hit record highs on the cryptocurrency exchange Bitfinex.

A minor bounce to $7,100 may be seen before a deeper drop.

A UTC close above $7,870 is needed to confirm a short-term bearish-to-bullish trend change.

Bitcoin continues to dial back gains seen in the last week of November amid a parabolic rise in bullish bets on the cryptocurrency.

The premier cryptocurrency fell to $6,828 on Monday to print the lowest level since Nov. 25 and was last seen changing hands near $6,900, according to CoinDesk’s Bitcoin Price Index.

With the drop to three-week lows, bitcoin has erased 76 percent of the corrective bounce from lows near $6,500 to $7,870 witnessed in the five days to Nov. 29.

While the cryptocurrency is losing ground, the number of bullish bets, as represented by the BTC/USD long positions on Bitfinex, have jumped to a record high of 44,523 contracts, surpassing the previous high of 40,193 reached in March 2018. Meanwhile, short positions have remained stuck largely in the 5,000–8,000 range.

As can be seen (above left), longs have increased by 78 percent in the last three weeks.

Interestingly, bullish bets began rising on Nov. 24 – a day before BTC bounced from six-month lows near $6,500 (above right) – and have continued to surge despite the recent pullback.

It’s likely that the sharp rise in longs represents traders who believe the cryptocurrency has made a major bottom near $6,500.

If that level comes into play again, investors may panic and square off (sell) their long positions, leading to deeper losses (a long squeeze).

Popular analyst Josh Rager thinks bitcoin will drop to $6,500, but after a minor bounce.

Meanwhile, Jacob Canfield, a guest trader on Forbes and CNBC, has forecast $5,500 as the bottom of the ongoing downtrend, which began from highs above $13,800 reached at the end of June.

Daily chart

Bitcoin violated support at $7,087 over the weekend and fell 3.27 percent on Monday, reinforcing the bearish view put forward by a lower high at $7,870 created on Nov. 29.

The descending 5- and 10-day averages and the below-50 reading on the relative strength index (RSI) indicate the path of least resistance is to the downside. The MACD histogram has also crossed below zero, confirming the bearish trend.

As such, bitcoin appears to be on track to test the Nov. 25 low of $6,511.

4-hour chart

The RSI on the 4-hour chart is currently below 30, signaling oversold conditions. Hence, a minor bounce may be seen before the potential drop to lows near $6,500 suggested by the daily chart.