Just days ago Bitcoin closed its monthly candle for September, marking three red candles in a row for the first time in 2019.
While this in itself may not seem significant. The three red candle closes have formed what could be a powerful Japanese candlestick pattern that signals a major trend reversal and a much deeper drop ahead. And if past occurrences of the pattern are anything to go by, the crypto market may be in for an extended crypto winter and possibly a return to the depths of the bear market.
Bitcoin Price Closes Third Consecutive Monthly Red Candle
Throughout 2019, Bitcoin has been on an upward trajectory, and at its peak brought investors who bought the bottom of its bear market as much as 350% returns. But starting at the end of June, Bitcoin’s bullish momentum began to fade, and the asset began trading within an increasingly narrowing trading range.
July closed the first monthly red candle of the year, setting Bitcoin’s first lower high. Another rally in August resulted in yet another lower high, and yet another red monthly candle close. At this point, it was clear Bitcoin was trading in a triangle pattern, however, analysts were torn as to which direction the formation may break out.
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Hope that Bakkt would fuel Bitcoin’s rocket to the moon kept bulls fighting, but once the platform launched on September 23, 2019, to abysmal trading volume and interest, bears took control and pushed Bitcoin’s price from $10,000 to under $8,000––an over 20% drop––in less than 48 hours.
The market fearing that Bitcoin’s bull run may be in jeopardy sparked a sudden increase in sell pressure that kept September’s monthly candle close in the red yet again, marking the third consecutive candle close in a row.
Worse yet, the third close in a row may have caused Bitcoin price charts to form an ominous reversal pattern, and one that could result in a powerful downtrend in the weeks and months ahead.
Three Black Crows: Does This Reversal Pattern Signal a Return to Crypto Winter?
The third consecutive monthly close may have formed a powerful Japanese candlestick pattern ominously dubbed three black crows.
Wikipedia defines three black crows as a candlestick pattern that “indicates a strong price reversal from a bull market to a bear market.” It is most commonly––but not always–– found at the top of an uptrend, and signals a powerful reversal.
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Leading up to and during the pattern, volume diminishes, and on the third candle, it will close on relatively high volume according to an Investopedia entry on the subject.
Like many chart or candlestick patterns, a confirmation is required for the formation to be valid, and can only be confirmed in hindsight. A confirmation of the three black crows formation would be a steep downtrend from here. However, when trading the pattern, investors are advised to watch for oversold conditions before a further fall, due to three consecutive bearish months exhausting some of the sell pressure.
The pattern is far more likely to confirm if the pattern appears on price charts of financial assets that coincide with other indicators flipping bearish. Further adding credence to the theory that this extremely bearish and powerful price pattern may have formed on Bitcoin price charts, is a confirmation of three separate indicators: the MACD, Stochastic RSI, and an indicator called the Fisher Transform.
Each of the three indicators has all turned bearish on monthly timeframes, suggesting that the trend is changing in a major way.
Ominous Reversal May Signal Dangerous 50% drop and Second Leg of Bear Market
All things considered, the trend ahead is not looking positive for Bitcoin. But how bad can things get? Most are certain that Bitcoin has bottomed and is building support for its next bull run, but considering the last couple of times Bitcoin price closed three consecutive red monthly candles in a row, extreme crashes followed.
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Up until July’s monthly close, every monthly candle before it in 2019 closed green. But before that, Bitcoin was coming out of one of its deadliest drops ever––the breakdown from support at $6,000 in November 2018.
Prior to the massive November 2018 drop that resulted in another 50% of Bitcoin’s value wiped out in the days following, Bitcoin closed not one, not two, but three consecutive red monthly candles. Could a similar 50% drop come following the potential three black crows pattern?
Looking further back, prior to the November 2018 drop, Bitcoin hadn’t closed three consecutive red monthly candles since 2014.
Following the top of the 2013 bull market, Bitcoin price crashed. Much like what happened in 2019, the crypto asset rallied from lows starting in April, reclaiming much lost ground. But July, August, and September of 2014 closed three red candles in a row. After that, Bitcoin price fell another 50% and the market saw the full extent of what the 2014-2015 bear market had to offer.
History often repeats itself and markets cycle. If Bitcoin has once again closed a three black crows candlestick pattern, a 50% drop from here may be ahead, much like has happened in the past. The drop in 2014-2015 also took Bitcoin price to its true bottom, which was a full retracement to the top of the previous cycle. If the same thing happens again, Bitcoin’s true 2018-2019 bear market bottom may be closer to $1,200 – the top of the 2013 bull cycle.
Frighteningly for bulls, if the July, August, and September candle close from 2014 is anything to go by, Bitcoin’s bear market could just be getting started, not coming to an end.