Issue 43 – False Breaks Are Signals Too

July 21, 2021


False breaks can be frustrating. Just when you think you have the market cornered, it pulls a fast one, leaving you with a loss.

But what if I told you false breaks are a powerful trading tool? Not only that, but there’s a way to identify the potential for a false break ahead of time.

Interested?

Today, I’ll share a method to spot potential false breaks early and how to use a confirmed false move to your advantage. We’ll then wrap up with a few charts, including BTC, ETH, VET, and others.

Let’s begin!


Immediate Vs. Rounded Retests

We’re seeing crypto markets test key resistance areas today following breakdowns earlier in the week.

Bitcoin, Ethereum, VeChain, Polkadot, Chainlink, etc., are all at critical resistance.

Many would see this as a potential sell setup given the downtrend we’ve seen from cryptos since April.

However, not all retests are created equal. For example, there’s a massive difference between an immediate retest and what I call a rounded retest.

Allow me to explain with a visual.

Notice how an immediate retest snaps right back to the level after breaking it.

On the other hand, a rounded retest is more gradual, allowing for space between the break and retest.

What’s the fundamental difference here? The amount of supply or demand.

You see, when a market breaks below support and then snaps right back to the level within a day or two, it suggests heavy demand below said level.

That isn’t what you want to see if you’re considering a short position.

But this works both ways. If a market breaks resistance and snaps right back to test the area as new support, that indicates increased supply above said area.

You always want to see a rounded retest of an area if attempting to trade in the direction of the breakout. Otherwise, there’s a good chance it’ll end up being a false break.

False Breaks as Sell Signals

Many traders think false breaks are just another reason to get upset about a busted trade idea. But they’re missing out on one of the best signals out there.

You know the candles with the really long wicks and small bodies that act as buy or sell signals? They can be called Pinocchio bars, shooting starts, hammers, etc. I call them pin bars.

Well, they’re often formed by false breaks on lower time frames.

Read that a few times if you must because I just dropped a bombshell on you.

It isn’t the mere shape of those candles that trigger reversals. Instead, it’s because there was a confirmed false break on a lower time frame. That’s why they’re so effective.

For instance, a daily pin bar usually forms because there was a false break on the 1-hour or 4-hour time frame or both.

So, the next time a market gives you a confirmed false break, don’t ignore it—trade it!

Total Crypto Market Cap (TOTAL)

The total crypto market cap is testing the March 2020 channel bottom today after closing below it Monday.

That area comes in right around $1.3T, just above the $1.25T horizontal level.

A daily close back above $1.3T would suggest that this week’s selloff was nothing more than a false break. In which case, a move to the $1.4T to $1.5T may be in the cards.

Alternatively, a close below $1.3T and $1.25T would keep the area intact as resistance for now.

TOTAL (daily time frame)

Bitcoin (BTCUSDT)

Bitcoin is up 8% as I’m writing this and looks poised to close back above $30,000 and $31,300. Both levels have been critical in recent months.

A close above $31,300 would flip the $30,000 to $31,300 area to support. It would also open up the February 2020 trend line near $33,000. That’s the next hurdle for buyers.

It’s far too early to tell if this is the low and whether or not the bull market will resume. I would need to see higher highs and higher lows to confirm that.

For now, all eyes are on $31,300 support and $33,000 resistance. Get above that, and BTC has a clear path to $36,000, potentially the range top at $40,000.

BTCUSDT – daily time frame

Ethereum (ETHUSDT)

ETH is testing the yearly open trend line today at $1,950. That’s going to be a key battle zone as we head into the 8 pm EST close.

If ETHUSD can remain above $1,950 into the close, that area should flip to support.

However, bulls still have to get above $2,050, which has been a pivot for ETH in the last few weeks.

A daily close above $1,950 and $2,050 would open up the $2,400 high. Alternatively, if ETHUSD remains below $1,950 into the daily close, watch for a retest of the $1,860 support level.

ETHUSDT (daily time frame

Polkadot (DOTUSDT)

If you saw Tuesday’s members-only newsletter, you know DOT was sitting on key support at $10. So it’s no surprise to see it testing the $13 range today.

Is the bottom in? I don’t know. What I do know is that buyers have to clear $13 on a daily closing basis to send DOT higher.

Above $13 is the bottom of the recent consolidation, perhaps near $17.

On the other hand, if $13 resistance holds, DOT could head back toward the $10 support region. Below that is $8.

DOTUSDT (daily time frame)

LINK is challenging $15 today after Monday’s close below it. That’s been a key support for Chainlink since May 23rd.

We’ll see if buyers can close LINKUSDT above $15 today at 8 pm EST.

If so, we could see the market push higher into the $17 confluence of resistance. That’s the intersection of the April 2020 channel support and a descending trend line from May 27th.

Bulls would need to secure a daily close above $17 to open up the next resistance near $20.

Alternatively, if LINK remains below $15 on the daily chart, the next key area of support doesn’t come in until the $10 range.

LINKUSDT (daily time frame)

VeChain (VETUSDT)

VET tested a key trend line resistance today. I’ve mentioned the May trend line several times, which currently comes in at $0.067.

There’s also a key horizontal area near $0.07. Buyers have to clear both areas on a daily closing basis to expose higher prices.

If we see VETUSD close above the $0.07 region, the next key resistance comes in at $0.093.

As for key support, the $0.04 to $0.05 area hasn’t left my radar since May. That’s a confluence of support for VET that could become a critical factor going forward.

VETUSDT (daily time frame)

Today’s Top Stories

$1,700,000,000 Investment Firm Bolsters Holdings in Grayscale Bitcoin and Ethereum Trusts

Asset management firm Rothschild Investment Corporation reveals in a filing that it bought tens of thousands of shares of Grayscale’s products in the last quarter.

Read more…

Mastercard partners with USDC to pilot crypto payments

Mastercard has announced a pilot program in partnership with Circle’s USDC stablecoin and others to enable cardholders to pay merchants using cryptocurrency anywhere Mastercard is accepted, according to a company press release.

Read more…

Disclosure: The links below are affiliate links. Meaning, at no additional cost to you, I will earn a commission if you click through and sign up.

Bybit

This is where I do most of my crypto trading. Bybit has the best platform out there, in my opinion, and is constantly adding new features and assets to trade. (You’ll need to use a VPN if they aren’t available in your country)

Justin Bennett

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About the Author

I'm Justin Bennett, a currency trader turned crypto enthusiast. My journey started with stocks in 2002. After limited success, I transitioned to currencies in 2007, which later became a full time trading gig. The journey continued, and in 2020, I committed to learning about cryptocurrencies. It was love at first sight. Cryptocademy.com is the culmination of my love for cryptocurrencies, my passion for financial markets, and desire to learn and teach.

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  1. it seems that the market wants to return back for lower low regarding the last 4h candle in BTC, ETH. (Bearish pinbar)
    the resistances (BTC 32400-ETH 2050-VET 0.07) still are intact and it seems it was just a pullback to them.

    I keep the short ETH position with 1500 target, what about yours?

    Good luck

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