Bitcoin price has been consolidating in a range between $525 and $485 during the past week. Daily updates have highlighted the ambiguity of trend. Are we at the start of a new uptrend or is the decline still in force – just pausing before the dive? An infrequent technical event has manifested in the form of a moving average cross-over and, as discussed below, it provides us with a timely canary in the coal mine.
New CCN Bitcoin Price Analysis Format
A new schedule for technical analysis reports has been adopted. A weekly in-depth report will be published every Sunday, and provide an overview of expected price action for the coming week or month. From Monday to Friday, daily updates will track the market’s progress and discuss significant market movements and events.
Ambiguous Bitcoin Juncture
The Bitcoin price chart is still pointing down. Until there is technical evidence of a new uptrend, the assumption is made that the decline is still in force. In this view, targets await in the low $400s, low $300s and around $160. We may not see all of them and only time will tell if we reach them via gradual decline or flash spikes to the downside.
Despite having convincingly struck the 1.618 Fibonacci extension downside target, calling a bottom at the recent low ($440 on Bitstamp) would be premature. It may be the bottom, but there would have to be confirmation of a new uptrend before we can call the eight-month long decline over. Let’s explore this view for a minute. The Bitstamp chart will be used as reference.
The alternate count (annotated in blue on the chart above) shows the interpretation whereby an uptrend had begun from label “C” in early April 2014. Its present reversal point is at blue label “2”. If we consider the low of 18 August as the end of the wave 2 decline then, the wave up from $440 to $534 will be the first wave of advance of the powerful wave 3 of the supposed uptrend. The subsequent retracement to $485 would be counted a wave ii. Second waves are typically three-wave zig-zags and the price action on the chart matches this description for both wave 2 as well as the current wave ii of wave 3. The current wave ii has also retraced 50% of the advance from the $440 low – which is sufficient for this interpretation.
So, we have evidence of a new advance, but it’s not conclusive yet. We would expect price to either make additional lows (without dropping below $440) or to advance from current levels. The nature of the advance would have to be strong, with long green candles, in character with a third wave, and it would have to reach $590 before displaying any sideways action.
The challenge is that this sequence of waves does not confirm anything because it is exactly the path that a retracement of the decline would make from the low at $440. An a-b-c zig-zag from $440 to $590 exactly resembles the confirming wave i-ii-iii combination we expect to see and we’d be none-the-wiser, having to wait for price to churn sideways around $590 and then to advance above $600 – thereby confirming advance – or price could reverse meaningfully from $590 and drop to lower lows – to our existing decline targets below. Hence, advance to $590 doesn’t prove anything and only subsequent price action will clearly show what the larger trend really is.
Sunday trade has drawn price back below $500. As can be expected over the weekend, trade is light and equal numbers of bulls and bears are placing orders above and below price. Except for a bot-gone-wrong over at BTC-e, its quiet weekend trade so far… with a question mark, as discussed next.
Bitcoin Moving Averages
The following study looks at the BTC-China chart in the light of its 200 period moving average (MA), as well as the 1000 period MA. Additionally, the 200 MA has envelopes drawn at a range of 10% above and below price. This exercise yields interesting results at all timeframes but on the 4-hour chart, an anomaly shows up.
On the chart below, notice the tendency of price to “stick” to the 200 MA. We also see that price respects the 10% range envelope (blue), often ranging within the envelope and at other times using the envelope as support/resistance from outside.
Whenever price strays out of the blue envelope for too long, it tends to snap back to the 200 MA and sometimes crosses over the 200 MA as a racing car does when the driver over-compensates steering to get back in the racing line. In most instances, after having traded outside the blue envelope, price snaps back to the 200 MA at its centre at least once – except for the two instances circled in magenta.
In both instances price action had traded outside the 200 period moving average envelope, subsequently returned inside the envelope but without touching the centre line. In one instance price proceeded to make a regional high and in the other a decline low. This phenomenon is present at the same junctures in all the BTC charts.
Direct inference that this past occurrence is what we are witnessing in current price action would be reckless. However, what we do have is a useful bellwether for what may follow. Should price drop through the bottom envelope line we can expect lower lows. Should it bounce off of the envelope bottom then we can expect it to return to the 200 MA centre line – at least – or in the event that price should cross over the 200 MA we can expect it to head – at a minimum – for the higher envelope line near $590.
As mentioned in the introduction to this report, an ominous MA cross-over is eclipsing upside hopes: the red 200 MA is in the process of crossing over the 1000 MA whilst both are slanting downward – a strong signal of at least one additional low.
Conclusion: Is the Bitcoin Price on its Way Down?
The direction of the trend is still assumed to be down. Although there are signs that a potential reversal may have occurred at $440, we lack confirmation of a new uptrend. Ironically, the very confirmation we seek will end up proving nothing, due to the awkward confluence of the advance target with an existing decline trendline at $590, as well as the permissible structural overlap of an A-B-C corrective wave with the first three waves of advance.
A Moving Average study reveals a bearish cross-over of the 200 MA and 1000 MA. The tendency of the Bitcoin price to revert to the 200 MA and to stray in and out of its +/-10% range envelope has given another bearish signal – not confirmed at present but raising a red flag nonetheless.
Traders and investors should practice caution right now. There may be much lower lows on the cards. The caveat is that price may correct back up to $590 before resuming the downtrend. The bullish view is similarly clouded by the fact that A-B-C (correction) and 1-2-3 (advance) are often indistinguishable in the Bitcoin chart.
Be ready to buy at levels below $440 and be ready to sell at $590. For shorter term trades, use the 200 MA +/-10% envelope lines as dynamic support and resistance but don’t let the market catch you unaware – use these lines for stop loss orders too. As always, keep in mind the risk of price spikes near market lows, as can be seen in the BitFinex and BTC-e charts.
Daily updates to follow Monday through Friday.
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 the outcome. CCN accepts no liability whatsoever for losses incurred as a result of anything written in this Bitcoin price analysis report.
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