Bitcoin Chart Analysis - The End of Trend

bitcoin chart reversalBitcoin Price is in the last leg of decline since the early-June high near $680. This downtrend, although relentless, is neither stronger nor more volatile than comparable declines in the first five months of 2014. In fact, the current wave down is characterized by little price swing and measured corrections. The big question is where it will end and the price level of the coming BTC/USD bottom will provide us with further clues as to the Bitcoin chart's next move.

That this is a highly opportune time in the market cycle to purchase Bitcoin is explored in this CCN article. The analysis below pins some probabilities on the likely bottom reversal. Before acting on the impulse to get in early, readers should read the section Coinbase Friday below.

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Update Fri 22 Aug 12h00 utc

BitFinex orderbook 22 AugDespite an alleged large buy order by Coinbase today, the chart shows its intention of turning back down - how far remains to be seen. The orderbooks are filled with buy orders all the way into the low $400s and these traders will find themselves underwater if large market sells are actioned. When the whales decide it's time, then it is time. The BitFinex orderbook is shown on the left with thousands of Bitcoin buy orders going down - these could discourage additional downside, but it's not guaranteed. One imagines that a large buyer would want to do so at lower prices...

Fibonacci extensions show the targets below and $470 at 2.618 looks like an inevitability if more downside is the game. However, we first need to get below $500. Should the market defy gravity and rebound upwards from $500 support then the 1.618 target below remains unsatisfied and price won't gain much height before turning back down. Looking up, it is conceivable that the market may plumb $495 (1.618), reverse and head north. in which case the previous update (Thurs 21 Aug below) target of $580 would be logical. Not a very committal verdict today, but the signals are mixed.

Bitstamp chart m15  22 Aug

Update Thurs 21 Aug

Since first publishing this article an exuberant wave to the upside has unfolded. As explored in the analysis below, the options are a) continued downside, b) gradual advance, or c) sideways consolidation. While sideways consolidation cannot be ruled out at (albeit over a wide range), it appears that the current wave to the upside is part of a correction and that decline is not over yet. The surge up is characterized by volatility and it could reach as far as $580 before reversing despite having pushed momentum indicators too far too fast.

There is no confirmation that this is the start of advance - despite the distance being covered. Such confirmation will be evident when price retraces 50% or more of the current wave up and then resumes the advance beyond the local high. Frustrating - yes. Uncertain - yes. However, bear in mind that Coinbase is (allegedly) making large bitcoin purchases tomorrow, Friday 22 August, and this event will catalyze participants into a direction. Before then, the tide has still to ebb and flow a few more times.

Bitstamp chart H4 21 Aug 2014

For now we cannot confidently say that the long-term decline has concluded. Caution for now. Additional updates to follow.

Brief

The Elliott Wave context of the current wave down makes it either wave E of the larger correction that began in November 2013 or wave ii of a mounting rally. The interpretation of an E wave was first proposed back in May when the writer anticipated a "bull trap" and price has not done anything since then to discount this wave count.

Should the present wave E reach it's termination below the last price low at $340 (Bitstamp) then we could expect a strong surge to the upside as the new rally explodes to the upside. On the other hand, if this is a second wave (down) then we could expect it to end above $340 and surge up in wave 3.

Price has been consistently reversing at .618 Fibonacci extensions of the first wave down. This chart shows it's progress.

Bitstamp chart Fib ext Aug 2014

Targets Below

The respect for .618 ratios of prior swings is a feature of many markets, but it is a strong structural aspect that underpins price swings in commodity charts, hence the similarities between the Gold and Bitcoin charts. Here is a Bitstamp daily candle chart that is annotated with Fib extensions on all major waves. Notice the pervasive role of .618 ratio levels at most reaction levels and reversals:

Bitstamp Daily chart 19 Aug 2014

By this principle, we can then expect the current wave to reverse at a .618 level too, and the chart shows likely targets for reversal all the way down to below $200. Not that the decline will necessarily plunge below $200 - but it is possible.

The three paths of wave action with greatest possibility are:

  • Price continues decline in a descending channel (see chart) with reversal at $320 which is the 2.618 Fib extension of wave a. Additional lows are possible, but $320 will put up tough resistance - if not the reversal.
  • Trend has already reversed at the current 1.618 Fib extension level and advance is underway - price will have to show some impulsive action to the upside to confirm this view.
  • Trend is in the process of reversing in a sideways consolidation. This view acknowledges the market's frequent use, lately, of contracting triangles as a means of gathering momentum before a larger surge. Marginal new lows may occur but the dominant direction will be to the east, with $450 (1.618) serving as the consolidative pivot.

    Bitstamp H4 chart 19 Aug 2014

    Looking at the 4-hour candle Bitstamp chart we see likely reversal levels for the wave ii alternative count. If the current downtrend reverses at one of the Fibonacci retracements (0.76 or 0.89) then we have a good foundation for interpreting the subsequent rally north.

    Coinbase Friday

    Significantly, news has emerged that Coinbase intends to purchase large amounts of bitcoin on Friday 22 August. As far as buy signals go, this announcement will serve as a sure-fire catalyst for a price surge to the upside.

    The Bank of Japan announcement of guaranteed stimulus measures back in April 2013 comes to mind. In that scenario, the market knew that the announcement - if it confirmed expectations - would trigger a buying frenzy. For several weeks prior to the announcement the Yen currency pairs descended in a stair-step fashion. Market participants liquidated Yen pair positions in anticipation of lower prices to open buy orders. Finally, on the day, at the pre-announced time, BoJ confirmed stimulus of 1.4 trillion Yen and an initial three-day surge launched the Yen into a rally that lasted over a year.

    It would be ill-advised to expect the BTC/USD market to react in exactly the same way but that episode from recent history serves as a useful reference. Given the excitability of the Bitcoin market, it may embark on a rally prior to Friday 22 August, or it could make a profit-taking dip subsequent to the rally surge. According to the three options of highest probability listed above, a sideways consolidation could also result. The best traders can do is to be prepared and ready for such outcomes.

    Reversal is Inevitable

    That BTC/USD will rally from its lows is generally expected. That Friday's catalyst will be the start of such a rally remains to be seen. Considering the market's age-old tendency to sell into a significant event, we could very well see the downtrend continue to one of the levels stated above, or - at the very least - see consolidation sideways (even beyond Friday) as the market considers its next move.

    Due to uncertainty, as to which level exactly the market will end up sinking to, traders may do well to adopt a Martingale strategy, here at the lows, for scaling into a long position (see the section: Market Bottom Strategy.)

    Rather than trying to call an exact bottom, it is advisable to anticipate reversal with buy orders placed above price. When a rally ignites - whether before or after Friday - it is likely to be fast and furious.

    This article is protected by copyright laws and is owned by CCN Markets.

About the author

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Venzen Khaosan

Market analyst and Open source developer with a keen interest in blockchain technology, consensus mechanisms and the decentralizing effect.

He has found a solution to the PKI mechanism. Email me to discuss.

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