Bitcoin Bears Failed inside-inside Setup

Market Video Report: Bitcoin

Duration 11:40 mins.

Summary

On the weekly chart, Bitcoin recently failed an “ii” (inside-inside) short setup. This failure prompted many traders to reverse their positions to the bull side, but those buyers now find their stop losses actively threatened. What does this imply? Looking at the daily chart provides some context: the market is stuck in a trading range and has just experienced a failed bull breakout. Consequently, bears are now taking control and looking to sell a second leg down, trapping the recent breakout buyers.

Transcript

Hi everyone, welcome back to this week’s Bitcoin price action analysis. My name is Josep Capo, and I’m a Price Action Trader and an author for the Brooks Trading Course website. Thank you for joining us as we take a look at Bitcoin on both the weekly and daily charts.

On the weekly chart, the market is currently in a bear trend, which is unfolding as a second leg down. When you look at this bear channel, you have to view it in the context of the higher time frame. As I explained in the previous weekly report when I was analyzing the monthly time frame, the market was coming from a very strong bull channel. Whenever there is a strong bull channel, it is essentially a buy climax, and after a strong bull channel, experienced traders expect a transition into a trading range as the strong bulls take profits and the strong bears begin to scale into shorts. Therefore, in this time frame on the weekly chart, the market is likely just forming a second leg down within what I suspect is a major trading range, rather than being in the mid-stage of a bear channel. Because it is a trading range, neither the bulls nor the bears are in total control. I do not think the market is going to go down much lower; I think it is a low-probability event that the market will consolidate below the $45000 level.

Over the previous weeks, we have been discussing an “ii” setup (two consecutive inside bars, which is a small, tight trading range and often sets up a breakout mode situation). That setup triggered this past week on the short side. Because the market is searching for value and balance, this short entry had about a 50 percent probability of succeeding and landing a favorable trader’s equation with a 2 to 1 reward to risk ratio. However, most breakouts from trading ranges fail. This week, the protective stop loss of the bears has been triggered. As is often the case, the stop loss of the bears was also a stop and reverse order, which served as the bull entry. Now, the price action indicates that this bull signal looks like it is going to fail, too. The protective stop loss for the trapped bulls is sitting just below last week’s low. The bulls also had a 50 percent chance of succeeding on their breakout attempt, and they are failing.

Yes, this is the reality of trading. You are constantly operating in a gray fog. If we knew with certainty that the failed bear setup would give us a 100 percent win rate on the reverse, then we could rationally risk 100 percent of our trading account. But trading is a zero-sum game and certainty does not exist. Because you can never be entirely certain of the market’s direction, most successful traders always risk less than 2 percent of their account per trade, and most of the time, they risk much less than that.

Now, what will the price do? Based upon what I will discuss on the daily chart, I think the market will test last week’s low. Based upon what I see on this weekly chart, it looks like the price is finding equilibrium and accepting current prices. These are the same accepted prices from back in 2024, since the market is currently around the middle third area of 2024’s trading range. 

I like to say that the targets are always the middle third areas of previous trading ranges, because the market tends to go from one middle third to the next one as it searches for value. When the price reaches a middle third area, the directional probability hovers around 50-50, and both the bulls and the bears feel comfortable taking positions. I think that when the price reaches this middle third area, limit order trading may become dominant as traders buy low and sell high, especially if there is not a strong climactic reversal at the retest of the low.

On the daily chart, the market has transitioned into a trading range following a tight bear channel. The tight bear channel went on for many bars without a significant pullback, and accelerated into an exhaustive sell climax. As the market approached the support area at the bottom of the chart (the green box), it experienced a sell vacuum. The strong bears saw this as a level where the market was underpriced and stopped shorting, while the strong bulls recognized it as an area of profound value and were eager to establish longs. This combination of aggressive buying and short-covering created in my view a very strong buy zone. The price recently tested down toward this support level but undershot it, forming a double bottom before rallying to test the top of the trading range.

I often say that it is critical to watch the price action closely when the market approaches the high of a trading range. Because the market is searching for equilibrium, a fundamental strategy for experienced price action traders is to buy low and sell high, meaning they look to fade the extremes. They look for reversal setups after tests of the upper and lower thirds of the range. In this instance, the bulls managed to create a bull breakout. More importantly, this breakout produced a micro gap (highlighted in the yellow box), which occurs when the low of the bar following a strong bull trend bar remains at or above the high of the bar preceding it. This is a sign of strength and was a critical moment for the bulls.

When evaluating a breakout, traders need to see immediate follow-through. They want to see the market consolidate above that micro gap, which would indicate that strong bulls are urgently pressing their longs and are eager to buy high. However, the market constantly exhibits inertia, and most breakouts from trading ranges fail. If the price lacks follow-through, reverses down, and closes the micro gap, it is a clear sign that the bull breakout has failed. This traps the weak bulls who bought the breakout into losing positions. As these trapped traders are forced to liquidate at a loss, their selling pressure invariably drives the market back down. The most likely outcome following a failed breakout at the top of a trading range is a reversion to the middle of the range, which is the ultimate area of balance and uncertainty where the directional probability is roughly 50-50. If the selling pressure persists, the second most likely target is a test of the lower third of the trading range.

Right now, the bulls are looking weak after consecutive strong bear trend bars on Thursday and Friday. Because the market regularly tries to do something twice and often moves in two legs, this weakness suggests that there will likely be a second leg down within the trading range, eventually testing the lows. This sets up several reasonable trades with a favorable trader’s equation. Bears can look to short a second signal—such as a low 2 short setup—betting on that second leg down to test the lower third of the trading range.

Alternatively, bulls can wait for the market to reach that lower green support area to look for a reversal setup. If there is a failed bear breakout at that lower level, perhaps forming a strong bull reversal bar, the market will likely bounce back to the highs, as this support zone has already demonstrated significant buying pressure. Regardless of the setup, it is rarely a good idea to blindly place orders without waiting for a reaction or a strong signal bar, unless you have exceptionally clear contextual support from a higher time frame chart. You must wait for the price action to confirm that the institutions have taken control before committing your capital.

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