Is the Bitcoin price dip toward $40K a bear trap?

Bitcoin (BTC) price finally witnessed a significant 7% pullback on Dec. 11 as multiple indicators flashed sell-signals and traders booked profits. Bitcoin’s ability to hold above $42,000 will determine whether this crash is a buy-the-dip opportunity or a general market reversal. 

Short-term volatility or big trend reversal?

The sharp BTC price drop observed on the daily chart corresponds with a sudden 6.5% drawdown and over $300 million long liquidations across the cryptocurrency market.

BTC/USD 4-hr candle chart (Bitstamp)

Zooming to the longer 1-day candle timeframe, however, this movement appears as a minor retracement in a more extensive bullish trend established over the past few months. Moreover, the relative strength index (RSI) has retreated back into neutral territory below 70 on the daily timeframe. 

BTC/USD 1-day candle chart (Bitstamp)

Last week’s analysis confirmed the strong uptrend that Bitcoin has been in, with significant momentum observed after the price breached the $40,000 mark​​.

This context suggests that the recent dip could be a short-term fluctuation within a continuing upward trend rather than a general trend reversal, though more downside or sideways actions should not be ruled out for the days ahead. 

Key BTC price levels to watch

As noted earlier, important levels to watch include $31,860, $28,050, and $25,200, which have been significant since 2021​​.

Related: Bitcoin dominance threatens ‘likely top’ despite BTC price eyeing $45K

Therefore, the fact that the BTC price has not approached these levels and the recent uptrend has been strong enough to surpass minor resistance levels with ease supports the argument that the current price action is within the bounds of a healthy correction rather than a bearish trend reversal.

Healthy corrections in a bull market

Corrections are considered a normal part of every upward trend. They are typically seen as healthy for the market because they allow for consolidation and can shake out weak hands, as demonstrated by the volatility in mid-November.

If followed by a strong bounce, the current drop would indicate that the market is still in a positive trend and traders are buying the dip.

Hence, the latest price drop must be viewed in the context of the longer-term trend, it seems more indicative of a temporary dip within a bullish phase rather than a complete trend reversal, at least so far. 

But, one must also consider that previous Bitcoin bull markets have all seen pullbacks of well over 20%, as shown above by the long drawdown wicks during each bull market phase.

In other words, Bitcoin could still drop much further, without halting the overall uptrend. However, its ability to hold above $42,000 will further strengthen the argument that this was just a short-term dip and sentiment remains overall bullish.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.