Week 14: BTC Slingshot
Wait for the falling knife to hit the ground before you grab it
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Welcome to Fifty Trades in Fifty Weeks!
This is Trade 14: BTC slingshot
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50in50 uses the case study method to go through one real-time trade in detail, about once per week. This Substack is targeted at traders with 0 to 5 years of experience, but I hope that pros will find it valuable too. For a full description of what this is (and who I am), see here.
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Update on previous trades
The three slices of the ARKK long position are on and the stop is $29. The stock is trading around $40 right now so the trade is underwater. This is the nature of catching falling knives… You usually feel some pain.
Slingshot Reversal
All the technical setups and formations that I use and believe in reflect, in some way, the underlying structure of the market. They reveal something about the behind-the-scenes activity happening on trading floors.
Conversely, this also explains the common feature of styles and approaches to technical analysis that do not appeal to me. Those approaches do not match something that happens in the market IRL. A highly-complex and mathematical approach that operates at 15,000 feet and does not directly mirror underlying trading activity will never appeal to me. Elliott Wave does not appeal to me. Gann fans do not appeal to me.
Perhaps subconsciously I have concluded that this feature of some approaches and not others is the difference between technical analysis as a “study of underlying market structure” vs. technical analysis as pig entrail reading/astrology.
An excellent example of a setup that makes sense in the context of real-life actions and reactions from traders is the Slingshot Reversal.
What is a Slingshot Reversal?
In this section, I will introduce the Slingshot Reversal, discuss how the pattern is traded, and provide an ancient example from the AUD/USD (Australian dollar) market.
A slingshot reversal occurs when a major support is broken but the price does not follow through and the market then reverses, going back up through the old support level. Here I am referring to a broken support but everything described in this piece also applies to the opposite formation, where resistance breaks and the rally fails and reverses back below the resistance. A Slingshot Reversal is a specific type of false break reversal.
The pattern works because the downside break of the major technical level clears existing long positions and creates new weak shorts. Breakout traders, bearish speculators, and momentum models pile in on the break, but use tight risk management. They are weak hands.
The chart below shows a textbook slingshot reversal. This chart is ancient because I took it from the original article I wrote about Slingshot Reversals in 2007. Amazingly, the pattern is still useful 15 years later. I could have used charts from 2022 but I like the throwback vibe of the old school chart. My bio from 2007:
Brent Donnelly trades the Australian, Canadian, and New Zealand dollars for Lehman Brothers New York. He has been trading foreign exchange for seven years. He also traded equities for five years and created a television cartoon, which aired nationally in Canada. He may be reached at brent.donnelly@lehman.com.
Don’t email me there; it will bounce back.
Anyway, have a look at the chart. From July 27 to August 8, 2006, the Australian dollar traced out a boring range between 0.7585 and 0.7685 (points 1 and 2). Many traders were excited about the possibility of a breakdown below 0.7585 and the level was attracting a ton of hype. Every spot trader on the street was bearish and ready to sell the break.
Finally, on August 8, Oz broke lower (point 3). This created a wave of new selling as longs cut their positions, new shorts entered, and black box models sold the technical break.
The Stages of a Slingshot
Then, whoosh! Slingshot Reversal! As the sellers ran out of bullets below 0.7585, buyers gained the upper hand, and soon, the AUD/USD started ripping higher (4). The rapid reversal took the Australian unit back toward the top of the range before a brief failure (5), then a topside break (6). Finally, the Slingshot lost momentum and the Aussie dropped all the way back to the old support (7) before bouncing. Both false breaks were excellent indicators.
The beauty of the slingshot reversal is that instead of catching a falling knife, it’s more like waiting for the falling knife to hit the ground, then picking it up. Not my best analogy ever. Also not my worst.
How I trade the Slingshot
Here’s how I trade the Slingshot Reversal:
Identify a significant level that many traders are watching (in this example, the support at 0.7585)
Wait for the market to trade clearly through the level. In this case, I used 10 points below the key level, then put a stop entry order 10 pips above. So when 0.7575 trades, input an order to stop enter; buy AUD/USD @ 0.7595 (point 4)
If done, stop-loss out of the position five pips under the previous low (in this case, 0.7563 is the low, so stop at 0.7558) (point 3)
You calculate the take-profit by taking the potential loss and multiplying it by 3 to create a 3-to-1 risk/reward. Here, the take-profit is (0.7595 - 0.7563) x 3 + 0.7595 = 0.7691. Alternatively, you can use other forms of technical analysis to come up with a logical target. I usually prefer market-based take profits, not ratio-based ones, but either approach is reasonable.
The Slingshot Reversal is a highly reliable pattern with a strong logic because of its effect on market positioning. Look for major levels that could yield Slingshot Reversals. The more that people are talking about a particular level, the better your odds of finding a Slingshot.
In real life, here’s what’s happening as a Slingshot plays out:
A narrative builds about the importance of the level and traders attach importance to it. The more hype and chatter about the level, the better the setup.
Bulls get long as the support level approaches.
Existing and new longs enter stop-loss orders below the level.
Shorts reduce risk (take profit) as the level nears.
When the level breaks, longs bail and shorts add so the positioning rapidly flips. The market goes from long to short in a hurry and most of those shorts are in the weak hands of breakout traders looking for an easy win.
When a Slingshot Reversal happens, you can hear the screams of the newly-added shorts from a mile away.
Trade 14: BTC Slingshot
Rarely has there been a level in markets that has attracted as much focus as the 30,000 level in bitcoin. Let me show you the chart at two levels of zoom.
Bitcoin 2017 to now (log)
Bitcoin Q3 2020 to now (with 9 touches of 30k marked)
You can see the nine probes of 30k, all rejected with great vigor. The absolute low on all those little breakdowns is 28,800.
I think it’s somewhat remarkable that 30k held again yesterday on the LUNA / NASDAQ meltdowns and one could make the argument to simply go long here with a stop below 28000. But I’m waiting for one last purge.
Here, I will define the Slingshot Reveral as follows:
BTC trades below 28,500, and then…
BTC trades above 30,300
.
Once this happens, the trade is to go long at market (stop into the topside trade through 30,300). The simple way to execute this is to wait for 28,499 to trade, then place a stop entry trade at 30,300. The stop loss on the long would be below whatever the low was when 28,500 broke. The position will be sized to risk 2% of capital based on the entry and the stop loss. Take profit will be (($ at risk) X 3).
If <25k trades, the whole idea is canceled as that’s not a false break anymore, that’s a straight-up hull breach.
Techs are not enough
I would never do a trade just because of a technical setup. In this case, the trade is consistent with my long-term view that bitcoin is the one cryptocurrency worth owning. BTC has no competition on the store of value use case IMO and it has the security credibility and true decentralization lacking in most other coins and tokens. Bitcoin is like a first edition. There can only ever be one first edition.
I have been mostly bearish BTC because of the macro cycle (see here, here, and here, for example) but things are getting scary enough out there that I’m willing to dabble from the long side in some risky assets.
If your fundamental view is that crypto is worthless, this is not a trade you should be doing. None of this is investment advice, ever. Since the trade fits my bigger picture view of buy the megadips in crypto, I’m interested in the Slingshot setup here. For a piece I wrote about other ways to buy the dip/crash in crypto (SOL and BTC), see here.
Conclusion
The less scary, and often higher expected value way to trade a falling market is to wait for a super well-known level to false break, then get involved. This puts you in a strong position when everyone else is weak and offers up trades that have easy risk management parameters and good risk/reward.
Slingshot Reversals don’t happen all the time. You need to find situations where the market is hyperfocused on a particular level and then get ready to pounce. A false break of the 30,000 level (which I define as a touch sub-28,500) could be the final cathartic washout we need to get bullish BTC.
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DISCLAIMER: Nothing in “50 Trades in 50 Weeks” is investment advice. Do your own research and consult your personal financial advisor. I’m putting out free thoughts for people who want to learn. This is an educational Substack. Trade your own view!
Ok, so after a crazy couple of days where are you with this trade? It almost triggered, then it traded through the knockout and now it’s back above the trigger! Headache FOSHO