Bitcoin price decline is on the cards again and, with it, the question: "Where will it end?"
A week ago, the market-wide sense had been that a consolidation similar to late-May's pre-launch contraction was developing - only to shatter at the last moment.
The analysis below (Bitstamp charts throughout) outlines target levels to the downside and considers a wave pattern analysis as pointer to where the market might be heading.
Update - Wednesday 30 July
Price has made a new low at $560 by throwing under the purple channel and immediately jumping back inside it. A new channel (blue) has become evident and which upper channel trendline price will advance to will provide clues as to what the market is up to.
Update - Tuesday 29 July
Price has retraced 62% of the advance from the channel bottom. In the Bitcoin chart this is typically a herald of additional upside, usually to at least 1.618 of the first wave up. As it happens 1.618 falls exactly on the contention level previously identified, namely $611. Additionally, $611 is close to the upper trendline of the channel that has contained price for the past few weeks. Breach of this level, to the upside, will open up the way to $637.
This Bitstamp hourly chart shows price action at the time of writing of this update:
Update - Monday 28 July
Price wrestled through $590 and found support at the lower trendline of the downtrend channel, around $575 (Bitstamp and Bitfinex) as discussed below. A strong bounce is evident at the time of writing with target unknown. Bitstamp's price action is especially vigorous. Wait to see how price reacts at the Fib extensions of the first wave up: 1.618 is at $592.70 ($587 for Bitfinex) and 2.618 at $596 for Bitfinex.
Until Bitstamp clears $600, there is still downside risk as per the targets outlined in the article. Rising above $611 opens the way to $640, then $660.
Bitcoin Price Debrief
Last week's analysis identified a juncture that would determine the immediate trend and whereby we could get confirmation of what stage the Bitcoin price was in, according to its present wave structure. Last week's chart is posted below and shows the critical juncture circled in magenta.
The crossroads formed by the purple declining channel (projected from the Nov 2013 all-time-high) and the long-term ascending trendline (dotted red diagonal) presented the bulls with an opportunity to stage an upside breakout.
It was proposed that if the bulls failed to grab horn, price would fall back to support at $610 - or the stronger support level at $590. Here is an updated chart of the price action since:
On Thursday (24th July) price action surprised many traders by simultaneously dropping through its 200 period moving average (red), as well as medium term support (solid blue) at $611. Within a couple of hours, the $600 psychological level also gave way and the sell-off halted just short of $590.
Subsequently, a retest of $600 occurred, failed, and during the early hours of Saturday price had dropped back to $590 - briefly dipping to $589 on both the Bitstamp and Bitfinex charts.
So what are the prospects going forward?
Scenario A: Continuing Decline
Should price breach the $590 support level, we could expect continuing decline to existing support/resistance levels - some of them reinforced by Fibonacci extensions of the first declining wave - as projected on the following chart:
Considering that Bitcoin price had (over a week ago) breached the long-term supporting trendline (dotted red diagonal), the current rate of decline is mild. Price is effectively in "free fall" territory, and the bears could aggressively assert decline, at any time and without much technical opposition.
Amongst the likely targets for the initial decline, the writer would, as always, favor those that coincide with Fibonacci levels 1.618 and 2.618. If $590 were to give way.
Scenario B: Pull-back Before the Rally
A strong argument in favor of advance can be made from an Elliott Wave analysis of the chart. There are several examples of clean five-wave advances being printed subsequent to the April low near $340. Additionally, there is evidence that an advancing diagonal may be forming, due to the large degree of the intervening three-wave structures shown by the annotations a-b-c.
The prospect of a diagonal wave unfolding to the upside, although exciting, is mere speculation at this stage. There is just no confirming evidence for it. In fact, any prospect of advance at the present juncture is fraught with risk and is marred by the real price action - which is clearly pointing down. It seems inevitable that price should either
- a) decline to one of the targets mentioned in Scenario A, or
- b) resist decline below $590 and market participants slowly come round (via consolidation) to the realization that longer term trend is pointing upward.
With regards to the above two turn of events (or even in the event of large institutional entry and a jolt to the upside - from $590!), the only way we can be sure of advance would be through objective confirmation on the chart. That confirmation would be for price to get back on top of $611, and then to advance beyond $680 in an impulsive manner. There are large sell orders waiting at $680 (in the Bitfinex orderbook and equivalent level at BTC-China) and $680 is sure to be a future reaction level.
The writer won't venture to call a bottom at this stage. Unfortunately, the only evidence of advance will be green candles reaching above the levels mentioned - "reaching above" is emphasized so as to mitigate the possibility of Bitcoin price unfolding a larger degree sideways triangle - a potential Scenario C, but best left for the market to confirm by attempting $660 and being rejected.
The writer is fully invested in Bitcoin via BTC-e and Bitfinex. Trade and Investment is risky, but not as risky as some other things out there. Take care only to take action in the market when you are 100% sure of your intended actions for the eventual outcomes. CCN accepts no liability whatsoever for losses incurred as a result of anything written in this report.
Featured image by Shutterstock.