Bitcoin Price Breakout – Technical Analysis Warns Bull Trap!

May 20, 2014 18:29 UTC

Bitcoin Price advance had slowed down to a crawl. The week-long sideways movement in the chart showed signs of turning back down. Then the widely anticipated breakout. Some analysts argue that an advancing rally is underway. The chart technical argue otherwise.

CCN Director’s Note: The Bitcoin price now seems to be on the rise. This article was written before the sudden price jump of more than 20 USD.

Takeaway

Price has broken through a 5 month declining trendline. The expectation is that a breach of this trendline is the start of an accelerating rally. Considering Bitcoin’s historic price behavior this is a possibility, but two factors weigh heavily on price: 1) the chart Elliott Wave count shows the current wave is advancing in a correction, and 2) price action is still consistently following the pattern it has exhibited during the past five months’ decline. Additional lows (or a new decline low) represent buying opportunities. If a rally is indeed underway, the current upside target is $1060 which should be achieved quickly. Should price turn back down, primary targets are at $360 (Bitstamp) and $350 (BTC-e). Breakout to the upside must confirm advance by testing the decline channel upper trendline – without dropping below it.

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Wait for Opportunity

[dropcap size=small]T[/dropcap]he critical juncture being displayed by the Bitcoin chart has polarized opinion. The bulls are rearing to stampede after months of waiting. The bears know that by waiting, the biggest fish come of their own accord. And so there are two camps: the “Imminent Breakout” hopefuls and the “Last Chance to Buy” opportunists. Admittedly, the attraction for bears is not the short selling potential of the remaining downside – it is limited by a dense cushion of demand below. Instead, an interest in buying at cheaper rates reveals their true (and bullish) motive. Those participants who are now proclaiming advance have evidently done all their buying and wish to see the investment actualize – perhaps fearing that a new low will fill their eager trading sensibilities with disdain for missing an opportunity.

Given Bitcoin’s historical tendency of immense rallies followed by near complete retracement over several months, no market player should castigate themselves for missing a low. Bitcoin will be right here at these lows again in a few months.

BTC-e

Below is the BTC-e 4 hour log scale chart with the same trendlines as originally published. Price had painted itself in a corner made by the decline trendline and a short-term rising trendline (dotted yellow). Using short-term support as leverage to overcome long-term resistance is arguably a clever bullish trick, and resulted in the current breakout (see Bitstamp chart below). Readers can visualize similar rising short-term support at each wave pattern A-B on the chart. The outcome is the same in each case – bullish corner painting ends in collapse. The fact that the present corner painting exercise had been more prolonged than previous instances shows that bullish sentiment is present in the market, but even so, a false breakout may be underway.

If advance is indeed being made in a B wave, price looks likely to drop back into the decline channel and land on the stronger longer-term red trendline. From there, another corner-painting opportunity presents itself, and will reveal more about the market’s intentions.

The chart shows decline targets on the way down. The primary targets for a potential bottom and trend reversal are: $350 and $260. Annotated in purple, $220 is the extreme low that the Elliott Wave count can bear, or else be invalidated due to the rule that requires wave 3 to not be the shortest. However, as has happened in BTC-e and other exchange charts, a spike can strike down to $140 without affecting this analysis.

Bitstamp

The Bitstamp 4 hour chart shows the Bitcoin price breakout that occurred across all BTC exchange charts. A 1 hour timeframe chart further down takes a closer look at this important chart feature.

An alternative wave count is annotated in pink. Although unconfirmed, this count implies that a five wave triangle is complete and that advance must therefore be underway. This count is shown because even in the event of a new decline low, this triangle count will be difficult to invalidate. We’ll return to it once the rally is confirmed. For now the primary count of a diagonal wave C has not been invalidated. Wave “c” of 5 outstanding. Invalidation can only occur if price closes above the decline channel and reopens on a new daily candle.

Notice the stochastic indicator at the top of the chart. A fast and slow stochastic are grouped in overbought territory – a signal that has not failed to precede reversal even once during the decline.

Established horizontal support and resistance levels are drawn in dashed blue. The lower level at $350 coincides with the 2.618 Fibonacci extension of the initial wave from the recent top: a powerful attractor and therefore a primary decline target and possible reversal point. However, further below, at $270/260, lies the secondary decline target and likely market bottom.

Patient, Alert

The current state of the market presents Bitcoin traders and investors with uncertainty. In fact, the biggest risk facing participants is the risk of positioning over-aggressively to the upside. Build any long position gradually, in anticipation of the inevitable advance. However, there is potential for a complex corrective structure to develop. Should the decline resume it is likely to become volatile, as sellers and buyers start whipsawing price here near the bottom. However, be alert that upward continuation does not leave you holding any opportunistic short position since the rally, when it capitulates, is likely to surge upwards with the expected power.

Disclaimer

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 to only 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 report.

Last modified: July 10, 2015 13:00 UTC

@venzen

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.