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The daily chart of Bitcoin (BTC) is drawing attention from analysts at Valkyrie Investments, who are closely observing a potentially bearish "head and shoulders" reversal pattern.

The "head and shoulders" pattern, a well-known technique in technical analysis, typically consists of three peaks - two smaller ones (known as "shoulders") on either side of a larger peak (known as the "head"). This pattern is widely regarded as a signal of an upcoming reversal in market sentiment from bullish to bearish. Chart analysts often view a breakdown below the trendline connecting the first two troughs as an indication to enter bearish positions."

"High timeframe trend metrics remain firmly bullish, a near-term [bearish] reversal chart pattern has emerged. Although not classically meeting the textbook criteria of a head and shoulders, price action since March 19 has painted an extreme high with flanking lower highs," Valkyrie's analysts, led by chief investment officer Steven McClurg, wrote in a note to clients early this week.

"If price breaches below the neckline, a suggested target zone of $24,000 is possible based on the measured depth of the pattern extended below the neckline," the note added.

Confirmation of a breakdown in the "head and shoulders" pattern would require a UTC close below the neckline support level of approximately $27,300, which could signal a further downward move in price.

Although graphical representations of price action, such as line or candlestick charts, can provide insights into market psychology, pattern-based analysis remains a subjective approach that does not always yield the expected outcome. While a breakdown of the "head and shoulders" pattern may suggest a deeper price decline, it can also result in trapping traders on the wrong side of the market.

The impact of macroeconomic events cannot be discounted as they can make or break market trends and invalidate technical patterns. For instance, a rally in Bitcoin could nullify the "head and shoulders" pattern if Friday's U.S. nonfarm payrolls data indicates a weaker-than-expected labor market, which could prompt the Federal Reserve (Fed) to consider interest rate cuts to stimulate liquidity.

At the beginning of this week, Federal Reserve Chairman Jerome Powell suggested that the central bank may pause its rate hike cycle, but emphasized that future decisions would depend heavily on incoming data. Since March 2022, the Fed has raised interest rates by 500 basis points in an effort to curb inflation, which had a destabilizing effect on cryptocurrencies last year.

Based on a Reuters estimate obtained from FXStreet, the upcoming nonfarm payrolls report scheduled for release at 12:30 UTC is projected to reveal the addition of 179,000 jobs to the US economy in April, following a higher-than-expected increase of 236,000 in March. The unemployment rate is expected to remain unchanged at 3.5%. Average hourly earnings are predicted to have risen by 0.3% on a monthly basis and 4.2% on a year-on-year basis, matching the pace seen in March.

Bitcoin is likely to experience a head-and-shoulders breakdown if the nonfarm payrolls report and wage growth figures exceed expectations, causing the U.S. dollar, which is currently heavily shorted, to rally.

Source Coindesk