Bitcoin Pullback Aligns with a Typical ‘Breakout and Retest’ Setup, Says Godbole

Understanding the Breakout and Retest Pattern in Trading

The breakout and retest strategy is deeply rooted in the psychology of trading and investing.

Think about the last time you went on vacation. After locking your door and walking away, you likely turned back to double-check if it was properly secured before continuing. Financial markets, driven by human emotions, often behave in a similar way. When an asset decisively breaks through a long-standing resistance, it frequently retraces to test the strength of that former resistance—now turned support—before resuming its upward trend.

This pattern, commonly referred to as the “breakout and retest play,” is widely observed across various asset classes. Bitcoin’s (BTC) ongoing decline could be a textbook example of this process—a natural retest of the previous resistance-turned-support at $73,757, which was breached in November.

Bitcoin’s Recent Decline: A Healthy Retest?

Bitcoin has fallen more than 15% this month, dipping below $80,000 and approaching the crucial support at $73,757. This level was first surpassed in early November when Bitcoin finally broke out of a months-long consolidation phase, spurred by the election of pro-crypto candidate Donald Trump as U.S. President.

Markets frequently retrace back to their breakout levels before launching larger rallies. This behavior stems from the psychological tendencies of investors, particularly their inclination to secure gains quickly. According to prospect theory, traders often lock in profits rather than letting their winning trades run, which explains why post-breakout rallies frequently stall, leading to a retest of the breakout point. Since December, BTC holders have been cashing out profits near the $100K mark, contributing to the recent pullback.

As prices decline toward the breakout zone at $73,757, traders who missed the initial rally may view this as an opportunity to buy, reinforcing the support level. This renewed buying pressure could trigger another strong rally, as seen in previous instances such as Q3 2023 and August-September 2020, both of which led to new record highs following successful retests.

The Risk of a Failed Retest

While history suggests that successful retests often precede major price surges, traders should remain cautious. A failed retest—where the price breaks below key support without rebounding—can signal underlying weakness and lead to a more extended downtrend.

There are numerous historical examples of breakout retests influencing market trends. For instance, Japan’s 10-year government bond yield triggered a double-bottom breakout in January 2024, revisited the breakout level multiple times, and then surged to multi-year highs. Similarly, the AUD/USD currency pair broke below a significant support trendline in December, briefly retested the level earlier this month, and has since faced steep losses.

Another relevant case is the S&P 500’s price action in early 2019. After breaking through a key resistance level around 2,800 in February, the index pulled back to test the level in March before rallying to new all-time highs in the following months. This move reinforced market confidence and led to continued bullish momentum.

Final Thoughts

Bitcoin traders should closely monitor price action around the $73,757 support level. If it holds, it could serve as a launchpad for the next major rally. However, if the level fails to act as support, a deeper correction could be on the horizon.

As history has shown, financial markets often move in cycles driven by investor psychology. Recognizing these patterns can provide traders with valuable insights into future price movements and potential opportunities.