Polkadot: How traders can take advantage of the breakout of this pattern to time entries
Disclaimer: The conclusions of the following analysis are the sole opinions of the author and should not be taken as investment advice.
The past two months have seen a visible bearish spectacle as they reiterated their strength amid market sell-offs. Heading south, the 38.2% and 23.6% Fibonacci levels remained strong depriving the bulls of a trend-altering rally.
The current price structure is an ideal bearish setup as price action tightens between the bearish pennant pattern.
Any reversal from the 23.6% level would expose DOT to a potential downside in the coming sessions. At press time, DOT was trading at $9.58, down 7.84% in the past 24 hours.
DOT Daily Chart
Gauging current Bitcoin sentiment, which has only gotten worse over the past 24 hours, it might be beneficial to have a conservative view on market movements.
Recent retracements pulled DOT to its 16-month low on May 12 after a weekly decline of 55% (May 5-12). Since then, gradual improvements on its lows have seen a negation by bearish peaks. Thus, forming a bearish pennant on the daily timeframe.
With a relatively steep mast preceding the pennant, sellers seemed determined to continue their streak of lower highs. Additionally, when the pennant formed, volumes were on a downward trend. More often than not, bearish pennants are most effective during such a downtrend.
With a confluence of the 23.6% level, the 20 EMA (red), and the two-month trendline resistance (white, dotted), DOT may be aiming to retest the $8.6 support. Any dip below this mark would provide further short selling opportunities in the $7-$8 range.
If the general sentiment improves, a bearish invalidation may lead to relatively short-lived gains up to the 38.2% level.
The recent trajectory of the RSI has resulted in gradual growth. But its higher highs diverged bearishly with the price action. Thus, reinforcing the short-term bearish edge. To invalidate this, the bulls needed to find a close above the index trendline resistance.
Likewise, the CMF joined the RSI in reiterating the divergence. Any close below zero would confirm the bearish narrative outlined above.
Looking at the bearish pennant pattern approaching the confluence of three hurdles, DOT could face a short-term setback.
A close below the flag would expose the alt for a test of the $8.6 support followed by the $7.3 area. If the bulls find new buying pressure, a short-term rally could lead to restrictions at the 38.2% level.
Finally, an overall market sentiment analysis becomes essential to complement the technical factors to make a profitable move.