ETHUSD: Watch For These Signs As The Bounce Continues.

ETHUSD update: From 863 to 492 in two days as all the coins experience a larger than usual retrace. The recovery leg is where things can be tricky, and I will explain what to look for in this market in order to determine if it will continue back to the highs or develop into a broader head and shoulders pattern.

As I wrote about in my previous BTC report, if you are investing, there is no safety in these markets. The best thing you can do is buy nearer a low and have a plan that guides your choices IF the market decides to retest the low, or consolidate before retesting the high. This plan is something you must develop, it does not matter how new to investing you are.

As far as this market goes, price has recovered quickly off the 492 level which is at the lower boundary of the .618 area support of the recent bullish structure. The long wick and break of that candle's high are bullish signs that make it reasonable to anticipate a higher low formation around the 628 level which is the .382 of the current bullish swing.

Also any retest of the 573 to 500 zone (.618 of recent bullish structure) offers an attractive area to look for bullish reversals on smaller time frames (4 hour, 1 hour). This 628 and 573 to 500 areas offer attractive reward/risk for swing trades in particular, which means you will have a predefined stop and target which have to be determined at the time of the trade. These levels are attractive because they are the proportionate resistance levels that the market can reasonably retest.

The first level of resistance is the 712 to 772 zone (.618 of recent bearish swing) which price is testing as I write this. A push through this area (very possible) can take price back into the 815 area where price sold off initially. This resistance is not only a projected target on the weekly (written about in previous report), but now a potential double top area which makes it a good profit target for swing trades.

The current resistance zone is tricky. Recent price action typically pushes through these initial zones after a more dramatic sell off, only to test the highs and go beyond. This is not a behavior that can be counted on. So I say there are two key behaviors to watch for: A tight consolidation within the zone forming a small bull flag which can be interpreted as the market is going higher, or a failed high formation, bearish pin bar(s), or a bearish outside bar which will establish a lower high and imply a retest of support levels.

If a lower high unfolds in this area, it would complete the right shoulder of a head and shoulders formation which is a very bearish sign. All I am saying is keep your eyes open because it can happen. A bearish head and shoulders can take price back to the 500 level or slightly lower which would be a attractive investment opportunity in my opinion.

In summary, before taking any position, you must first decide on an outlook. If it's long term, then you have to size appropriately in terms of the risk you can afford and stick it out no matter how low it goes. That's investing, NOT swing trading. If a short term move is what you are more interested in capitalizing on, then you must pay attention to the structures and enter the market when the price presents a formation that makes sense in terms of reward/risk. The other thing is you must EXIT at least a portion of the trade when a target is reached. If you want to then transition into a longer time horizon for a smaller portion of the position, you will have that choice (as long as you are willing to give back your profit in the smaller position). Where you are exiting the trade should be determined before you enter, no matter what time frame or strategy you are employing. In terms of my plan, I prefer to look for a swing trade at one of the predetermined supports and evaluate from there.

Question and comments welcome.