Although at time of writing Bitcoin (BTC) is attempting to break out of its corrective phase from last week - still unconfirmed - there is one argument floating around that suggests that price must correct further. Today we will investigate this argument: the CME Futures “gap” argument.
A “gap” on an asset’s price chart is an area where price never specifically traded, for a number of reasons. In particular, rapid price movements caused by intense trends (like the one Bitcoin just had) will cause gaps, especially when overlapping with periods of market closure. Investopedia outlines four types: breakaway gaps, exhaustion gaps, common gaps, and continuation gaps.
While gaps are common for traditional assets, whose markets open and close at certain times, gaps on cryptocurrency charts are far less common - for the cryptos with higher liquidity, it is virtually unseen. Bitcoin, as the leading crypto, is the primary example here: you just never see a gap on a highly liquid exchange (I challenge the reader to find a recent one).
But Bitcoin also trades on an institutional futures exchange, the Chicago Mercantile Exchange (the CME, which recently saw historic trading volume highs on Bitcoin) - and here, we do see gaps in the price chart. And during the recent exuberant uptrend, the CME Bitcoin futures chart has had no fewer than four gaps, all falling on weekends.
Three out of four of these gaps have been filled; one, just under $9,000, has not.
‘Gaps Always Fill’
There seems to be a common maxim among traditional traders that gaps tend to always get filled, eventually - price will retrace from wherever it is to fill that gap in good time.
This notion that gaps fill seems mostly correct. But the phrase seems to be a simplistic aphorism rather than a cogent trading strategy; and one guide has remarked that “holding positions waiting for breakout or runaway gaps to be filled can be devastating to your portfolio.”
The obvious question we are building to is: will Bitcoin retrace to fill this gap?
The CME Bitcoin futures product is not very old, having launched in December of 2017, just as Bitcoin was reaching its all-time high.
Looking back through the entire history of that chart to date, it is indeed the case that an unfilled gap is nowhere to be found.
Just based on this, we could take fairly good odds that the unfilled region will eventually be retested. This area, precisely from $8,515 to $8,985, is depicted below. As discussed in a recent CryptoGlobe price analysis, this exact area is a likely target for a full Bitcoin correction from highs of nearly $14,000.
Our only saving grace may be that, the previous price action on the CME occurred entirely within the crypto bear market of 2018. This market was absolutely a different animal than the present one, with a long term downtrend that seems to have reversed - and perhaps the same rules do not apply.
The views and opinions expressed here do not reflect those of CryptoGlobe.com and do not constitute financial advice. Always do your own research.