Once again, bitcoin finds itself precariously perched on the bottom of its macro trading range (TR). After a strong round of selling over the course of two weeks plunged the price back to the $6,000s, bitcoin began consolidating for several weeks at the bottom of the TR:

Figure 1: BTC-USD, 1-Day Candles, Macro TR

As shown in the figure above, the market has interacted several times at the current price range and it has been a source of three major bullish rallies. Currently, there is a lot of bearish pressure trying to submerge the price but very little price movement. If we take a look at the open long and open short positions on Bitfinex, we actually see a record-setting short count for the year as shorts outnumber the longs by almost 30%:

Figure 2: BTC-USD, 1-Day Candles, Longs vs. Shorts

So far, this is the highest the short count has been since bitcoin topped late last year. Also, one thing to note is not only how high the short count is, but how high it is compared to the open long positions.

In situations like this, where the shorts far outnumber the longs, the perfect scenario for what’s known as a “short squeeze” is created. If the shorts continue to stack within a given price range, as we are seeing now, then there is a high possibility for a cascade of short liquidations/short covering to take place.

Basically, what happens is this: As shorts begin to liquidate, they are forced to buy back their position and propel the price higher. This movement, in turn, begins to liquidate the other positions with stops set just above them which then cascade the liquidations (and the price) higher and higher.

If we look at the Bollinger Bands (bbands) on the daily candles, we can see the price is consolidating very tightly as the bbands have begun to “squeeze” around the price action thus indicating price consolidation.

Figure 3: BTC-USD, 1-Day Candles, Bollinger Band Consolidation

Typically, when bbands squeeze, this is a forecast for increased volatility. And, because these are daily candles, it is likely that the next move will be a macro move in either direction.

It’s impossible to know with certainty which way the price will move, but given the number of shorts that keep opening — and the relatively low amount of price movement — the stage is set for a pretty sizeable move upward.

There’s no concrete rule that says “high short count always yields a short squeeze,” but the foundation is definitely laid for one. The last time we had shorts anywhere this level, the price jumped 20% in one day. The short count back then was just under 38k bitcoins. The short count right now is 38.6k bitcoins.

Summary:

1. Bitcoin is, once again, testing the support of the macro TR.
   
2. As shorts begin to rise, the price is seeing very little reaction. As a result of the high short count over a relatively narrow price range, there is a possibility of a sizeable short squeeze.
   
3. To further support just how narrow this price range has been and just how tightly wound the market is right now, the daily bbands show a strong squeeze on a macro level that will likely yield a strong move in either direction.
   

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