The Psychology Behind the Breakout and Retest Strategy
The breakout and retest strategy is deeply rooted in the psychology of trading and investing.
Think about the last time you left for a trip. After locking your door, you probably paused and turned back to double-check if it was truly secure before proceeding. Financial markets, driven by human emotions, exhibit a similar tendency. When an asset breaks past a long-standing resistance level, it often retraces to confirm the breakout’s validity before continuing its upward trajectory.
This well-known market phenomenon applies across various asset classes. Bitcoin (BTC) appears to be undergoing such a process, with its recent decline possibly serving as a healthy retest of its breakout point—the previous resistance-turned-support at $73,757, first breached in November.
In essence, Bitcoin’s downward movement may lose momentum near this level, potentially setting the stage for a stronger rally ahead.
Bitcoin’s Price Action: A Healthy Retest?
BTC has declined by more than 15% this month, falling below $80,000 and revisiting the key level of $73,757. This price point was originally broken in early November when Bitcoin ended a prolonged consolidation period following the election of pro-crypto candidate Donald Trump as U.S. President.
Markets often pull back to retest breakout levels before embarking on larger upward moves, largely due to behavioral investment tendencies. Investors are naturally inclined to secure profits rather than let winning trades run indefinitely. This risk-averse behavior, explained by prospect theory, often causes post-breakout rallies to stall temporarily, leading to a retest of the breakout zone. Since December, BTC holders have been taking profits around the $100K level, contributing to the recent pullback.
As prices approach the breakout zone at $73,757, traders who missed the initial rally may seize the opportunity to buy, reinforcing the support level. This influx of buyers could fuel a fresh rally, similar to past occurrences in Q3 2023 and August-September 2020, where breakout retests preceded record-breaking surges.
Potential Risks and Market Implications
While historical patterns suggest a strong bounce, traders should remain cautious. A failed retest—where the price fails to hold at support—could indicate underlying weakness and lead to a more significant downtrend.
Over the years, multiple markets have demonstrated this breakout-retest pattern. For instance, the yield on Japan’s 10-year government bond experienced a double-bottom breakout in January 2024, repeatedly testing the breakout level before surging to multi-year highs. Similarly, the AUD/USD currency pair broke below a major support trendline in December, briefly retested the level earlier this month, and has since faced sharp losses.
Bitcoin traders should closely monitor price action around the $73,757 support. If this level holds, it could trigger renewed bullish momentum. However, a breakdown below it may signal a more extended correction.
As history shows, markets often move in cycles driven by investor psychology. Recognizing these patterns can provide traders with valuable insights into potential future price movements.
