Bitcoin’s ongoing sell-off could be a classic “breakout and retest” play, according to Omkar Godbole. This phenomenon is rooted in the behavioral aspects of trading and investing.
In mid-2020 and 2023, a similar pattern emerged with Bitcoin and Japanese 10-year bond yields, respectively. After breaking through resistance levels, assets typically return to confirm the validity of the breakout and test the strength of the former resistance-turned-support.
Godbole notes that financial markets are driven by human emotions and exhibit similar behaviors. When an asset breaks out above a long-held resistance, it’s common for prices to revisit or “retest” the breakout point before staging a bigger rally.
Bitcoin has dropped over 15% in recent weeks, exposing the former resistance-turned-support at $73,757. Prices broke above this level in early November and have since consolidated. The tendency of markets to retrace or revisit the breakout point is driven by people’s risk aversion and the prospect theory, which explains why post-breakout rallies often run out of steam.
As prices near the breakout point, market participants who missed the initial rally jump in, ensuring the level holds. This results in a bounce from the former resistance-turned-support, drawing in more buyers and potentially yielding a bigger rally.
Historically, successful retests have led to bigger moves in traditional markets, including a double-bottom breakout in Japanese government bond yields in January 2024. A failed retest or lack of meaningful bounce can indicate underlying weakness that may evolve into a full-blown downtrend.
Godbole suggests that traders should be cautious but also consider the potential for a bigger rally if prices run out of steam near the $73,757 level.
Source: https://www.coindesk.com/markets/2025/02/28/bitcoin-btc-price-sell-off-could-be-a-textbook-breakout-and-retest-play