Is This a Bull-Trap? Is the Market Being Manipulated by Stop-Hunters?

This may be a bull-trap and the Bitcoin charts seem to have formed a head and shoulders pattern.

First, let me state that I’m not saying the following scenario is being played-out, but it’s something, as traders, we need to be watchful of with a CBOE futures expiration approaching on the 31st August. We have certainly seen enough of these big sell-offs at futures expiration times to appreciate that this may well happen again prior to the 31st and there’s no doubt that big players view sell-offs as an opportunity to accrue some more Bitcoin.

Let’s look at this 1-hour Bitcoin chart to understand how big players might be manipulating the market prior to a sell-off around futures expiration on 31st, which will retest 6k support.

First, at point 1, we see a pivot, as price turns and we see a sell-off. I personally do not believe this first pivot to be manipulation, as we can see a trend prior to the pivot and this is likely to be buyers taking profits, or partial profits, which equals selling at the level, rather than people selling in order to push the price down.

However, the ordinary trader forms the conclusion from this that because the price couldn’t get above that level and turned away, this must be resistance, so many ordinary traders probably went short after the pivot, placing tight stop-orders above the ‘resistance level’, as they sought to manage their capital and percentage risks. Indeed, that’s what all the trading literature would advise them to do.

Unfortunately, this kind of price action tempts the big players off the sidelines to manipulate the market and do some stop-hunting, as they understand that there will be a cluster of stop-orders above the level and in order for big players to grasp the opportunity to accrue some more Bitcoin off the back of the ordinary trader before a sell-off around futures expiration time, first of all they need to do some buying to create a break-out, whilst placing buy orders above the level.

At point 2, we see a large bullish engulfing candle as the price breaks-out, triggering those stop-orders in a forced liquidation event. Even traders with stops further away think the level has broken, so many of them exit as well. Then, with the break-out, the ordinary trader jumps in, believing resistance has now become support, but there is some more manipulation as we see another large engulfing candle, at point 3, this time bearish, which breaks ‘support’, triggering stop-losses again.

Since then, this level has so far held as resistance. All the big players have got to do is a little bit of buying to bring price up to the level and a little bit of negative price action selling to bring the price away from the level to create the perception that this level is actually being tested, but holding, in order to induce the ordinary traders into sell positions with tight stop-orders, before they repeat the process of forcing the price up through the level again.

Finally, after the price has been forced through the level again, maybe more than once, the price will smash the level at point 4, which may be next week, or the week after.