Bitcoin Chalks Out 'Head and Shoulders' Pattern Ahead of U.S. Nonfarm Payrolls: Valkyrie Investments

Although not classically meeting the textbook criteria from technical analysis of a head-and-shoulders pattern, price action since March 19 has painted an extreme high with flanking lower highs, Valkyrie's analysts said.

AccessTimeIconMay 5, 2023 at 11:21 a.m. UTC
Updated May 5, 2023 at 2:27 p.m. UTC
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Analysts at alternative asset management firm Valkyrie Investments are closely monitoring what looks like a bearish head-and-shoulders (H&S) pattern on bitcoin's (BTC) daily chart.

The popular technical analysis pattern is characterized by two rallies or shoulders flanking a bigger one, representing the head. Chart analysts see it as a sign of an impending bullish-to-bearish shift in the market trend, with traders often taking bearish bets once prices drop under the trendline connecting the first and second troughs.

"High timeframe trend metrics remain firmly bullish, a near-term [bearish] reversal chart pattern has emerged. Although not classically meeting the textbook criteria of a head and shoulders, price action since March 19 has painted an extreme high with flanking lower highs," Valkyrie's analysts, led by Chief Investment Officer Steven McClurg, wrote in a note to clients early this week.

"If price breaches below the neckline, a suggested target zone of $24,000 is possible based on the measured depth of the pattern extended below the neckline," the note added.

A head and shoulders pattern has emerged on bitcoin's daily chart, signaling near-term pain for the leading cryptocurrency. (Source: Valkyrie, TradingView)
A head and shoulders pattern has emerged on bitcoin's daily chart, signaling near-term pain for the leading cryptocurrency. (Source: Valkyrie, TradingView)

A UTC close under the neckline support at around $27,300 would confirm a H&S breakdown, opening the doors for a deeper decline.

While a graphical representation of price action in the form of lines or candlesticks helps illustrate psychology, the patterns are a subjective form of analysis and often do not work as intended. In other words, a breakdown of the head and shoulders may not always lead to a more profound price drop and can trap traders on the wrong side of the market.

Macroeconomic developments can make or break trends and invalidate patterns. In other words, bitcoin may rally, invalidating the H&S if Friday's U.S. nonfarm payrolls data signal labor market weakness. That would strengthen the case for the Federal Reserve (Fed) to pivot in favor of liquidity-boosting interest rate cuts.

Early this week, Fed Chairman Jerome Powell opened the doors for a potential pause in the rate hike cycle, but, at the same time, stressed that the next move depends largely on the incoming data. The Fed has raised rates by 500 basis points (or 5%) since March 2022 – the tightening cycle aimed at controlling inflation roiled cryptocurrencies last year.

According to a Reuters estimate sourced from FXStreet, the data due at 12:30 UTC is likely to show the economy added 179,000 jobs in April following a better-than-expected 236,000 additions in March. The unemployment rate likely held steady at 3.5%. The average hourly earnings are forecast to have risen 0.3% month-on-month and 4.2% year-on-year, matching March's pace.

The odds of bitcoin witnessing a head-and-shoulders breakdown soon will increase if the wage growth and payrolls figure blows past expectations, putting a bid under the heavily shorted U.S. dollar.

Edited by Parikshit Mishra.

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Omkar Godbole

Omkar Godbole is a Co-Managing Editor on CoinDesk's Markets team.


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