Playing breakouts and retests is rooted in the behavioral aspects of trading and investing.

Updated Feb 28, 2025 1:15 pm UTC Published Feb 28, 2025 7:09 am UTC

What you need to know:

• The BTC price drop looks like a classic breakout and retest pattern, which typically leads to larger rallies.
• Similar events were seen in mid-2020 with BTC and the 10-year Japanese bond yield.

Remember the last time you went on vacation? As you closed the door and headed to your car, you probably turned around to make sure the door was securely locked before you continued on your way.

Financial markets, driven by a host of human emotions, exhibit similar behavior. After a convincing breakout through long-term resistance, assets often retrace to confirm the validity of the breakout. This serves as a test of the strength of the pre-existing resistance-turned-support, and larger rallies begin.

The phenomenon of the “breakout and retest game” is well-known across asset classes. The current Bitcoin (BTC) sell-off could be just that – a healthy retest of the breakout level or former resistance-turned-support at $73,757 that was breached in November.

In other words, the downward momentum may weaken at or near these levels, potentially creating conditions for a more pronounced upside.

BTC has fallen more than 15% to below $80,000 this month, exposing former resistance-turned-support at $73,757. Prices broke through that level in early November, ending months of consolidation after pro-crypto Donald Trump won the U.S. presidential election.

The tendency for markets to return to a breakout point before starting a more significant rally is based on the behavioral aspects of investing.

People are generally risk-averse when it comes to realizing profits. So when faced with a profit, traders quickly lock in their profits rather than letting a winning trade run its course. The so-called prospect theory explains why rallies after a breakout suddenly fizzle out, often leading to a retest of the breakout level. BTC holders have been locking in profits around the $100,000 mark since December.

Now, as prices decline and approach the breakout point, in this case $73,757, market participants who missed the initial rally are starting to enter the game, ensuring that the level remains. The resulting bounce off former resistance-turned-support attracts more buyers, potentially setting the stage for a larger rally.

This is exactly what happened in the third quarter of 2023 and in August-September 2020.