The Breakout and Retest Strategy: A Key Market Pattern

The breakout and retest strategy is a fundamental concept in trading and investing, rooted in behavioral psychology.

Think about the last time you left for a trip. After locking your door and heading to your car, you probably turned back to double-check if the lock was secure before continuing. Financial markets, driven by human emotions, behave in a similar way. When an asset decisively breaks through a long-standing resistance, it often retraces to confirm the breakout before continuing its trend.

This “breakout and retest” phenomenon is widely observed across asset classes. Bitcoin’s (BTC) recent decline may be a prime example—potentially a healthy retest of the previous resistance-turned-support at $73,757, which was breached in November.

Bitcoin’s Price Action: Retesting Key Support?

Bitcoin has dropped over 15% this month, slipping below $80,000 and revisiting the key level of $73,757. This price point was initially surpassed in early November when Bitcoin finally broke out of a prolonged consolidation phase following the election of pro-crypto candidate Donald Trump as U.S. President.

Markets frequently pull back to test breakout levels before resuming their upward movement. This tendency is tied to investor psychology—particularly risk aversion. Traders often secure profits quickly instead of allowing their winning trades to continue, as described by prospect theory. This behavior explains why post-breakout rallies can temporarily stall, leading to a retest of the breakout point. Since December, BTC holders have been taking profits around the $100K level, contributing to the current pullback.

As prices approach the breakout zone at $73,757, traders who missed the initial rally may enter the market, reinforcing support at this level. If buyers step in, the resulting bounce could lead to another strong rally, much like what occurred in Q3 2023 and August-September 2020, both of which saw record-breaking gains following successful retests.

The Importance of a Successful Retest

While past trends suggest that a strong bounce often follows a breakout retest, traders should be cautious. A failed retest—where the price falls below key support—could signal underlying weakness and trigger a more extended downtrend.

Many financial markets have exhibited the breakout-retest pattern. For example, Japan’s 10-year government bond yield experienced a double-bottom breakout in January 2024, revisited the breakout level multiple times, and then surged to multi-year highs. Similarly, the AUD/USD currency pair broke below a significant support trendline in December, briefly retested the level earlier this month, and has since faced steep losses.

Another notable case is the S&P 500’s price action in early 2019. After breaking above a key resistance level around 2,800 in February, the index retraced to test the level in March before rallying to new all-time highs. This reinforced market confidence and led to continued bullish momentum.

Final Thoughts

Bitcoin traders should watch price action closely around the $73,757 support level. If it holds, it could serve as a foundation for the next major rally. However, if BTC breaks below this level, a deeper correction may follow.

Market cycles are driven by investor psychology, and recognizing these patterns can provide traders with valuable insights into potential future price movements.