Last Updated: 14 July 2022
When the US inflation figures were released yesterday, the bitcoin price dropped about 5% in a matter of seconds. This was largely because inflation turned out to be a lot higher than expected. Unexpected twists usually have a significant impact on the price, and yesterday was a clear example of this.
However, as you can see on the chart below, it did not take long for the price to recover from the downward movement in the hours that followed. With bad news about significant high inflation in the US, you would not expect the price to recover within a few hours. It is, therefore, quite possible that this is a short squeeze. In short, this means that there is a snowball effect on the stop losses of traders who have gone short.
First of all: what is going short? Good to know is that you can’t just buy and sell bitcoin directly. As with the stock market, it is also possible to speculate on the price. For example, you can bet on a rise in the price, in which case you take out a long position. But you can also gamble on a decrease in the price, and that is called a short position. When traders close a short position, most of them also place a stop loss. This is a level at which they are convinced that when the price is going to rise above this level, it would be sensible to close the position in order to keep the loss to a minimum.
Of course, the level at which the traders place a stop loss is determined by means of technical analysis. However, when many traders make the same analysis and place a stop loss on the same level, this could lead to a domino effect when the price is going to reach this level. This is because it will cause a lot of short positions to be closed at the same moment. Because of this, the price will move up, and it will trigger even more stop losses. This, in turn, will cause more rises and more short positions to be closed. This domino effect is also called a short squeeze. (You can find a detailed explanation of a short squeeze here)
Now it is time to zoom out a little more and switch from the 5-minute chart to the 4-hour chart. Bitcoin has been moving sideways between the red and green boxes for about a month. The red box is still showing significant resistance, and the green box (the support) is still intact also. We call this sideways trend the ‘decision time.’ There is a good chance that the price will make a decision on which direction it wants to go in, in a short time.
The chance that we will see more downward movement is strong. We see that the price is moving in an upward channel, and this is not the first time that this has happened this year. The previous two times that an upward channel was visible on the chart, we saw the support fail not long after, and more red candles appear. If this is the case, we can expect a small support around $16,000 (16,000 euros). But a real strong support is still a lot lower, namely around 13,900 dollars. (13,900 euros).