I had said in my previous analysis on Bitcoin that I hope it breathes a little around the $70,000 zone that I drew, mainly because this zone represents the two highest points of the surpassed bull run, and there were concentrated reactions around the same zone during the past bull run.
An important signal here is the speed at which the price rebounded to re-enter the zone when it touched $60,000, making a long wick on the weekly candle. This is interpreted as strong buying pressure as soon as it reached that price, exceeding the selling pressure with which the price was dropping.
There can be several theories, one of which is the fact that on Bitcoin, a huge part of the volume is on leveraged contracts (e.g., futures). Traders place almost all their stop losses and liquidation levels at the same spots: below visible supports (70k, 55k, old lows, psychological zones, etc.). These levels are public and predictable, as they stem from price structure and human behavior. Also, factors like price action theories or chart patterns.
When liquidity is concentrated below a level, it only takes an initial selling pressure (Trump tweet, news, economic announcement, spot sale, or simple imbalance) to break the support. Once the level jumps, the price reaches that of the stop losses and automatic liquidations are triggered: long positions are closed at market, creating even more selling, which accelerates the drop. Once this liquidity is absorbed, there are not enough sellers left to continue the drop.
Whales do not always cause the drop, but they estimate where it is likely to stop, relying on probabilistic reasoning based on very concrete benchmarks. They then place limit buy orders in these liquidation zones to absorb a significant amount of selling without causing the price to explode, in other words, to acquire bitcoins at lower prices than in a market without liquidations. This is why the price can drop violently, touch these zones, and then bounce back almost immediately, as demand was already waiting.
If you learned something from this article, let me know in the comments how you plan to use it in your trading.
