BTCUSD: New Lows? Welcome To The Fake Out Zone.

BTCUSD update: Price has made a dramatic lower low at 7665 and is now right in the middle of the 8171 to 7239 minor support zone. Even though the short term momentum is now clearly bearish, it is very important to not lose sight of the location of this price action.

In my previous BTC reports, I wrote about quiet markets being a sign of possible strength, and about how it is better to wait for the market to show its hand and being prepared for the possible outcomes both bullish and bearish. Well the market has spoken. First by taking out the 8822 inside bar low, then closing below the 8659 reversal zone boundary and now testing the broad support zones that we have not seen for a while. At first glance, it looks pretty negative but when you consider some of the factors driving this sell off like Goldman Sachs and Google recent news, it is not hard to see that this is nothing more than overreaction. Bigger picture fundamentals have not changed.

For short term traders who are day trading or even swing trading, this is certainly a welcome move, if you have the ability and courage to short this market. As for position traders who are long, such as myself, I see no reason to sell. In fact in light of the recent spike in short interest, this market is in an ideal position for a dramatic fake out and squeeze. Short positions are piling on as price pushes into a major support zone? On top of that, the 7776 level is the reversal zone boundary relative to the 8342 swing low. Proportionally the current price location is the most likely place for a short squeeze to begin. In other words this is where the herd sells the bottom.

Now keep in mind, a fake out or reversal is not in play until reversal candles form, close and get their highs taken out. Just because we are in a high probability location does not guarantee that it will happen. Waiting for price to prove itself is what prevents premature trading which leads to trouble, especially on the smaller time frames. Right now momentum is bearish and it must be expected to continue this way until a change materializes and proves itself.

How you manage your decision making in this situation strongly depends on your outlook and time horizon. I am not day trading these markets, and secondly I am managing a long term position. I can't just throw out my long term outlook and change my entire plan because of a market over reaction. Like I wrote about in my previous report, I have accepted the risk inherent in this market which means I am not afraid to lose. This is what prevents me from getting shaken out during times like this while adhering to my bigger picture plan, especially since this market has not yet pushed below 6K.

In summary, look at this move for what it is and do not get sucked into the massive hype that looks to capitalize on it. As long as price stays above 6K, it is more likely to be range bound on the broader time horizons which is what carries more weight. Sure, short term traders who had the courage to get short 1k points ago look like a hero, but if you are not one of those traders, then NOW is NOT the time to start shorting. I have been writing for weeks about the possibilities of the market choosing a short term bearish scenario only to set up for a fake out, particularly at these levels. And when I see the right patterns, I will add to my long, because this is where bigger picture risk is relatively low. If price continues lower which is also possible, I will just hold on to what I have and wait. As long as nothing changes in terms of the broad fundamentals of these markets, this is nothing more than a buying opportunity engineered by the big money.

Questions and comments welcome.