Bitcoin Price Decline Targets Below $400 (Bitcoin Analysis)

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Jungle Bitcoin Price Analysis Workshop

The Bitcoin price decline has resumed after bulls staged a weak rally to levels around $450. Last week’s Bitcoin analysis forecast a retracement to the $450 area and, like clockwork, early Monday trade is showing signs of pushing to our interim target at $400 and perhaps lower. However, the price decline is about to run up against rising channel support.

Takeaway

Pattern analysis shows that trend is still heading to the downside. While keeping an eye on continued risk of decline, traders and investors should focus on systematically building their Bitcoin long position. Those traders who are short the market should expect a bounce at the psychological level of $400, but should keep an eye on evidence of additional downside and search for targets around $380, $350 and $330 going down. A long term channel trendline currently lies at $380 and may be a reversal point – but it has previously been breached, so it is currently the most critical support level to watch.

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Bitcoin Price Paint-By-Numbers

[dropcap size=small]B[/dropcap]efore presenting analysis for current price action, it’ll be useful to establish the progression of trend since the November 2013 all-time high. The question is: “What is the current stage of trend?”

The chart below shows the Bitcoin price action pattern that’s been repeating since December 2013. The indicators at the top and bottom of the chart are irrelevant to this discussion, although they may be of interest to some readers. One thing worth noting is the volume indicator (sandy color, second from bottom), which shows lower lows being made accompanied by declining volume of trade. Click on the chart for a larger image and study the details inside the colored geometric shapes for a few moments. A handful of well-established trendlines are shown – specifically note the red trendline that is a long term channel boundary dating back to early 2013.

BTC-e Bitcoin Pattern Study 6 May2014

Price action within a pattern group (e.g. the pink triangles) is not identical, yet these patterns are self-similar in their function and outcome. From a functional perspective, the three patterns of wave action are:

  • pink triangles have the function of progressing decline
  • blue triangles rapidly (but only partially) correct the decline, and
  • yellow arcs represent consolidation in a range before the next decline

In terms of outcome, the result of price action entering each pattern is the same each time: price moves through the pattern and reaches the same trendline as it did in the previous instance of the pattern.

Infinite Possibilities, Limitied Probabilities

It is possible to find both larger and smaller patterns within the colored shapes on the chart. However, the present analysis does not aim for maximum depth or infinite possibilities. We are merely identifying sequential patterns of similar function and outcome. Using this simple, visual method we can now answer the question “What is the stage of trend?” and the answer is: the pink triangle stage of declining trend.

The expected outcome is price decline to the $270-$380 area on the chart occupied by the golden Bitcoin.

Strong support currently lies at $380 in the form of a long-term channel trendline – shown as a dashed red line on the chart above. Here is a longer-term logscale chart that reveals the channel more clearly:

BTC-e Bitcoin logscale chart 6 May 2014

Viewed from this perspective, possibility of further decline certainly looks less likely! If this support level holds then it will establish the market bottom at $348 when it last rejected price in mid April.

If the channel support gives way then the way then the next level of support will be found at around $120-$150. This support level is frequently used and is well-established. It is not implausible that price drops out of the channel in a classic “underthrow” of the channel support line, and drops to the area indicated by the red dot. It is an eventuality that every Bitcoin trader and investor should make provision for.

Should price fall below the channel support line, then the market will be offering buyers a great opportunity of increasing returns – a math challenge we have all run through our minds on occasion: At a price of $425 per Bitcoin, $1000 buys 2.35 BTC. At a price of $140 per Bitcoin, the same $1000 will buy 7.14 BTC. Before price works its way to the lower $100s, buyers should already have a strategy and plan in place for progressively buying more Bitcoins as they become cheaper. The first article in this analysis series presents a strategy, based on the increasing-returns principle, for effectively buying into a falling market – see the article section titled “Market Bottom Strategy”.

Ankle Pants

This analysis would be incomplete without considering the alternative scenario, namely that trend has reversed already and that we should be looking upwards instead of down.

It can be argued that, in probabilistic terms, it is safer to assume that price is repeating a prior pattern and that it is heading down – until proven otherwise. Any wave action above the pink triangle boundaries as well as any breach of the trendlines that capped the decline will imply that trend has changed its direction to the upside.

In the case of the current decline (since late-April), there has been a breach of an important upper trendline where the yellow and pink areas meet. However, price quickly retreated back below the trendline and then worked its way back into the pink triangle area. That is a warning that the bulls attempted to stage a break-out but failed. Any subsequent breach of that trendline will invalidate the current declining pattern and will most likely signal the start of a new rally.

An hourly timeframe chart shows that price is currently trailing below a local trendline, between the critical trendlines to the north and south. At its present trajectory price will reach an apex corner of converging trendlines by mid-May.

BTC-e BTCUSD Hourly Chart April to May 2014

Conclusion

Traders who are short the market should expect a bounce at the important psychological level of $400, and keep searching for targets around $380, $350 and $330 going down. Bitcoin price is trading in a narrow range and a breach of nearby trendlines both above and below will determine whether price decline continues or whether reversal had in fact occured back in April.

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.