Bear Rallies – Bull Traps

The recent price action in crypto feels really good. The market in the past week has given us double-digit gains, with Bitcoin (BTC) pumping over 20 percent. Those lovely green candles are irresistible, and we find ourselves checking the charts, and our portfolios, much more frequently. When the market is so bullish, it’s easy to think that we are ‘off to the moon’ once more. The current situation could be sustainable, and perhaps we are leaving the market bottom behind. But then again, it may all be just a trap.

Bear Rallies – Bull Traps
Bear Rallies – Bull Traps, Image by storyset on Freepik

Euphoria can make suckers out of us all, but before we talk of bear market rallies and bull traps, it’s worth taking a moment to summarise what has been happening.

An Institution-Driven Rally

During the past week, a counter-trend rally has occurred. Bitcoin led the price action, which pumped more than the major alt-coins. BTC dominance increased. This suggests institutional buying is the main reason for the rally. It is institutions that have significant money on the sidelines ready to deploy. Had the rally by lead by retail investors, then alt-coins would have rallied more than they did. The catalyst was the U.S. Federal Reserve (FED) Consumer Price Index (CPI) data. The markets may have got leaked the positive news early because the rally began before the official announcement. Again, this is further evidence that the rally was institution driven.

Unfortunately, it is unlikely that the trend will continue for the simple reason that the global macroeconomic situation remains bleak. In a short time, we will be able to exactly identify what we have been going through. Now, there are two market phenomena that anyone needs to be familiar with. These are the Bear market relief rallies and Bull traps.

What Are Bear Market Relief Rallies and Bull Traps?

Investopedia defines a bear market rally as “…typically the product of bullish sentiment on the part of risk-tolerant investors and traders. After prices have fallen sharply for a period, and panic selling begins to subside, prices may start to stabilize (or at least fall at a slower rate).

At this point, bullish investors who aren’t afraid of taking on some risk may begin to buy back into stocks, hoping to establish a low-cost basis in order to maximize future gains. This influx of buy orders can drive prices up temporarily—perhaps for a few days or weeks, and sometimes for over a month—but if the momentum isn’t sufficient (and it usually isn’t the first time around), market-wide concerns about overvaluation can once again begin to startle risk-averse investors, who may sell to avoid additional losses, jumpstarting another wave of bearish selloffs.”

While a Bull trap is “…a false signal, referring to a declining trend in a stock, index, or other security that reverses after a convincing rally and breaks a prior support level. The move “traps” traders or investors that acted on the buy signal and generates losses on resulting long positions.

When the reversal occurs, many market participants are going to find themselves on the wrong side of the price action and may have to exit positions with losses. To reduce your chances of being trapped in the future, consider the following (though these points are far from being exhaustive):

Ways to Save Yourself

Apply the market mantra of ‘if in doubt zoom out’. In short time frames it can be difficult to assess the true direction of travel but by stepping out the overall trend becomes clearer. Also, identify important resistance and support levels.

Try to work out if the market, and individual coins/tokens are under or overvalued. There are many on-chain indicators to help in this like the MVRV Z-Score. This is a bitcoin chart that helps identify periods when Bitcoin is extremely over or undervalued relative to its ‘fair value’.

Also, ask yourself is what happening is just a bunch of accumulation?  A simply way of answering this is to look at what the Whales are doing by following metrics that track wallet holdings and movements. There are many additional tools that can help, you have to find the ones that work for you.

And in terms of strategy, ‘Dollar Cost Averaging’ will help mitigate against traps over a longer timeframe.

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Redfista
Redfista is a British author and content creator. He has interests in Bitcoin, crypto, blockchain, Web3, and NFTs!

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