The setup does not look perfect for a rally. That is based on what your indicators show, but suddenly you see the price movement go to the upside. This does not seem possible. Traders get destroyed if they had short positions. However, the uptrend does not continue, and the price falls back to previous levels of support or it can fall even lower. This happens a lot with the cryptocurrency market, a sign of just how volatile prices are.
This is what technical analysts would refer to as a "dead cat bounce" if it happens quickly, or in more general terms a "fakeout" or "fake breakout". It gives a false hope of prices rallying to the upside, despite indicators showing the opposite. When this happens it can be so sudden, traders may not have time to react to adjust their positions. Those who have a short position will lose, as longs liquidate the shorts. However, it suddenly drops back going to the downside. Rather than a continued rally, prices fall. Thus it is a temporary run up or recovery in asset prices, but not a signal of a sustained rally.
If your indicators are not looking bullish, and you see a sudden movement up, it can be a fakeout. This is a temporary move that may have been caused by a large buy order, but there is no further volume to support it. In other words, if no volume exists to sustain a rally then you are likely to go back to the downside once sell offs occur. It is a bull trap because those who are bullish may open up long positions with the expectation of further surges in prices. Those who do more analysis may recognize a fakeout based on RSI and volume, but also by applying TA techniques like Bollinger Bands.
Bollinger Bands allow traders to see if an asset is being overbought or oversold (also can be checked with RSI). In Bollinger Bands, you are looking at an upper and lower band or trend line on a chart. According to analysis, traders believe the closer the prices move to the upper band, the more overbought the market, and the closer the prices move to the lower band, the more oversold the market. Based on that data, in order to mitigate the risk from fakeouts, traders can set stop loss orders. This is done at specified levels in order to prevent any losses, should they occur.
The sudden reversal in price movement is what really creates this situation. This goes counter to the signal a trader expects, when the price moves in the exact opposite direction. An example of a fakeout is when there is a bullish uptrend that reaches a top, but then suddenly heads downwards with a bearish impulse. In Bitcoin, the fakeout of the 2021 cycle was when traders expected the digital asset price to hit $100K by the end of the year. During the summer of 2021, Bitcoin prices fell and things were on the downside. You then had a late rally that reached a new ATH ($68,789.63 back in November 10, 2021) so analysts were predicting the next level would be somewhere above or near $70K. That rally would not be maintained though. By the end of November and into December the sentiment turned bearish as the Fear and Greed Index went below 25 (more fear) and the price of Bitcoin fell nearly 43-45% of its ATH.
In terms of Bitcoin, when prices suddenly increase, traders go to the charts to make sense of any analysis. If the current economic situation is dire, analysts are assuming any sudden surge in prices is a possible fakeout. When in doubt, zoom out. This will show a longer trend cycle of the 200-day MA and 50-day MA. If there is a breakout from this fakeout it would be pushed by higher volume in trading and any indicator like the 50-day MA moving above the 200-day MA. Positive news can also be encouraging, but it must indicate more buying. If it is just some sudden surge without any continuation in buy pressure, beware ... that could be a fakeout.
Disclaimer: This is not financial advice. The information provided is for reference and educational purposes only. DYOR always to verify any information.
