The price of Bitcoin (BTC) has increased from $10,995 to over $11,200 in the past 12 hours. But while the momentum of BTC also pushed up the price of other top cryptocurrencies, including Ether (ETH), key metrics and technical patterns suggest the chances of a pullback are rising.
Cryptocurrency market snapshot July 31. Source: Coin360
Three factors that hint at a drop are the fear and greed index, a potential Wyckoff pattern and major resistance.
The crypto market sentiment is at “greed,” data shows
According to data from Alternative.me’s Crypto Fear & Greed Index, the market sentiment is at greed. The index has hit 75 points, and every time the index reached a clear peak, Bitcoin corrected.
The Crypto Fear & Greed Index 1-year chart. Source: Alternative.me
The last time the index reached a local top was in February 2020, when it reached 65 points. A month after, the price of Bitcoin dropped to as low as $3,596 on BitMEX.
Historical data shows that when the index hits a new high, BTC tends to pull back. But the way the market sentiment is measured is highly subjective. For instance, 30% of the index is composed of social media and surveys, which are non-quantifiable data.
In a prolonged bull market, cryptocurrencies can stay overheated for an extended period, as seen in 2018 and 2019. As an example, the price of Bitcoin rose to as high as $14,000 in June 2019 before pulling back.
Bitcoin faces strong resistance
The price of Bitcoin corrected from the $11,200 to $11,400 range three times in the past three days. Metrics that suggest Bitcoin’s rally is overheated are insufficient on their own. But when combined with a relevant market structure, the argument for a bearish scenario could strengthen.
Historically, there has been lackluster resistance between $11,500 and $14,000. Hence, the chances that sellers would attempt to defend the $11,200 to $11,400 resistance range remain high.
When buyers break through the strong resistance area, the likelihood of bigger uptrend increases. Trader Michael van de Poppe explained that a breakout above $11,200 could trigger a rally to $11,700. He said:
“Crucial threshold is still the $11,200 level. Breaking through and $11,500-11,700 is next!”
Rafael Schultze-Kraft, the chief technical officer at Glassnode, raised a similar concern. Pinpointing historical BTC price cycles, he said:
“‘We will never see BTC below $10,000 again’, Episode 13. Last episode lasted one day.”
A potential Wyckoff formation and a head and shoulders pattern
Meanwhile, popular Bitcoin trader filbfilb suggests that BTC/USD may be forming a Wyckoff pattern, which typically results in a steep downtrend. Although the viability of the Wyckoff formation is contested, when combined with other metrics, the probability of a distribution phase rises.
A potential Wyckoff pattern forming on a lower time frame chart of Bitcoin. Source: Filbfilb
One pseudonymous trader also noted that in the short-term, BTC faces a possible head and shoulders (H&S) formation. In technical analysis, the H&S pattern is a widely-recognized as a signal for a market top. The trader said:
“Everyone talking about BTC ripping higher when it's painting the cleanest H&S in its history?”
The momentum of Bitcoin seems to be on the side of buyers, as it repeatedly tests a key resistance level. In the near-term, it faces strong resistance and two bearish patterns that might cause a downtrend.