What to Know:

• The decline in Bitcoin’s price appears to fit a traditional breakout and retest pattern that may precede larger rallies.
• This occurrence has historical parallels, observed previously in Bitcoin and also seen in Japanese 10-year bond yields.

Introduction: When you take a vacation and ensure your door is locked before leaving, it mirrors the patterns seen in financial markets, influenced by human emotions. After breaking previous resistance levels, it’s common for assets to test their new support, which signifies the earning potential and strength of the former resistance.

The ‘breakout and retest’ phenomenon is prevalent across various asset classes. The current decline in Bitcoin (BTC) might just be a healthy pullback at the pivotal breakout threshold or previous resistance-turned-support at $73,757 that was surpassed in November.

Given this context, price drops might stabilize at these critical levels, which could lead to significant upward movements.

Recent Bitcoin Performance: Bitcoin has lost more than 15% this month, falling below $80,000 and reaching the former resistance-turned-support of $73,757. This price point was cleared following the 2020 U.S. Presidential election in which pro-crypto candidate Donald Trump was victorious.

Behavioral finance concepts help explain this tendency for retractions at breakout points. Investors often prefer to realize gains quickly, halting upward trends. As BTC nears the breakout point again, many traders who missed earlier rallies may be incentivized to enter, thus affirming the level as a support.

Conclusion: These dynamics are evident, stressing the importance for traders to recognize that failed retests or lackluster rebounds signal potential weaknesses leading to more significant downturns. Observations in traditional markets over the years have shown that retests frequently generate more substantial movements.