Longterm Technical Analysis of the Bitcoin Price

Published:
20/04/2014 17:52
EST. Journalist:


This analysis report take an historical perspective of the BTC/USD price chart. In the absence of the most complete historical price chart, namely that of Mt.Gox, this report will use the BTC-e chart, and try to make sense of all its spikes and idiosyncracies, in an effort to make both medium / long term forecasts and price predictions for the BTC/USD pair.

Takeaway

Technical analysis reveals that BTC/USD has a medium term upside target above $2,000 (see chart below). However, there is no conclusive sign that the decline since December 2013 is over. A break above the upper resistance TL (presently near $526 and around $500 at 30 April) will signal a change in trend. Until this event, expect ongoing correction to be in force. Traders and investors are alerted to the potential of additional price lows to targets near $350, $260 and even $140. These lows represent discounted buying opportunities as most market participants continue to sell.

A daily candle close above the upper resistance trendline, followed by a test of this trendline from above will indicate that the previous resistance has become support. Continuation toward $600 in strong upward waves will confirm that trend has changed to the upside.

Overview

For months, traders and Bitcoin enthusiasts have expressed their puzzlement over the fact that the Bitcoin price has been in continued decline despite receiving so much mainstream attention and institutional interest.

At the end of 2013, the decline was blamed on the PBoC “banning” third party BTC exchange transactions. Then the deplorable collapse of Mt.Gox was given as a reason for terminal collapse in mid Feb. Various central banks continued their cautious and concerned posturing, while others openly legislated Bitcoin tax provisions and thereby legitimized cryptocurrency in their national economies. The decline continued. The reasons may be many and arguable, but one thing is for sure: The price chart never lies.

Long Term Chart

The Daily timeframe chart below shows price history since August 2012 in log format. Before reading the analysis, note that Elliott Wave labels have been annotated to facilitate references to price points. Also, trendlines of significance have been drawn, as well as, horizontal time divisions of approximately seven months’ duration. The time divisions are of the same duration and match successive market tops exactly.

The bright blue trendlines show the channel that BTC/USD has respected since April 2013. The lower trendline (bright blue) represents a support floor that has enforced itself on five occasions. This up-sloping support line can be interpreted as Bitcoin’s minimum growth trajectory. It is currently at $120 which means it has doubled since a year ago, and this doubling continues at an annual pace according to the support floor’s present inclination.

A likely target for the ongoing decline is shown at the orange dot near $260 where a long-term rising trendline crosses the path of price action. The point also represents the natural conclusion of the current decline in five waves and is a likely reversal point that should be achieved in mid-May.

The red point, at label ‘II’ on the support floor, could be the ultimate destination of the current downtrend. Given the slow but steady decline to lower lows during the past four months, a market bottom at $140 cannot be ruled out.

Upside targets

BTC/USD market tops on 17 Aug 2012, 8 Apr 2013 and 29 Nov 2013 are separated by an average of 234 days (~7 months). The correlation is uncanny. The next 234 day demarcation falls on 24 July. Will the market capitulate and form a top near this date?

Maybe so, yet whatever day BTC/USD does choose to top out, the upside target is likely to set a new all time high for asset percentage growth records. Here’s why.

Two trendlines inform the upside target of the next BTC/USD advance. Firstly, a trendline connecting the Aug 2012 (label “1”) and Nov 2013 (label “I”) tops. This trendline (purple) cuts through the Apr 2013 market top and allows significant headroom for future BTC/USD highs. A more conservative approach is preferred in this analysis, namely the bright blue trendline connecting only the Apr 2013 (label “3) and Nov 2013 (label “I”) price highs. The trajectory of a trendline drawn in this way is slightly lower and allows us to project a possible range for the next market high.

The writer will restrict his forecast to the most conservative range possible. Readers are welcome to use the chart to find higher targets, although caution is advised in case over-exuberance leads to craven greed.

In what will probably redefine Bitcoin as a Super Commodity, price looks set to achieve a market top between $2,400 (straight up from present levels) and, where the bright blue upper trendline intersects with the projected top on 24 July, an impressive $4,200 per Bitcoin. Readers can verify the price at label ‘III’ (green dot) on the chart.

A price high of $2,400 represents an increase of 480% from current levels near $500 and an unprecedented 2.9mil percent price value increase from when Bitcoin’s exchange rate was $0.08 in June 2010. Expressed as an annual percent growth rate it equates to 750,000 % per annum.

Truly amazing and, according to the simple technical analysis done in the chart above, it is both plausible and likely.

Confirmation of the price target above $2,000 can be gleaned from calculating the Fibonacci 2.618(*) extension of the height of wave “I” which is $1,077.23 on the BTC-e price chart and rounded down for our calculation:

$1070 * 2.618 = $2,801

(*) 2.618 is used even though the BTC price chart tends to extend to a 3.618 ratio when making a new high.

Closer look

The major feature of the 4 hour timeframe view is the red descending trendline that caps the decline since December. Price must breach this trendline to indicate the market’s will to advance. To mitigate a false breakout, it would be advisable to wait for a daily candle to both open and close above this line. In doing so, the transition from resistance to support will be confirmed. Until such time, it cannot confidently be stated that trend has reversed.

To the downside, several likely targets present themselves. The most obvious two are marked with orange and red dots. An extreme low near $140 is shown where the lower bright blue trendline exerts its magnetic pull.

In view of the risk that price may abandon its behavior of bouncing off the lower growth trajectory, and drop to sub $100 levels, traders should not fear this outcome but be prepared for it.

Market Bottom Strategy

Analysis does not favour either of the downside targets since Fibonacci extensions (middle and left) drawn from wave “a” and wave “i” show both as likely. Although a rally may start from any level (including the time of writing current level of $500), it would be prudent to not preempt the market with over-eager early entry, but to use the declining red trendline as a bellwether. Having said that, readers may want to buy at $260 and then employ a hedge – in case decline continues to $140. Only employ hedging if you know exactly what you’re doing.

A more suitable strategy for opening long trades at a market bottom exists. It’s simple and effective and can be used by both novices and seasoned traders alike. It is the age old Martingale.

Scaling into a position as price declines, avoids the risk of calling a bottom – and getting it wrong – as well as the agonizing “hope-a-dope” while decline continues and margin call approaches.

A simple, yet effective, Martingale in this BTC/USD chart would be to divide the current price into $100 increments and to then open a position as price reaches each incremental level. The appropriate position size for each level is calculated by applying a series formula to your available trading capital. Let’s assume five $100 increments and available trading capital of $3,000:

Sum of a series = n * (n + 1)) / 2
S = 5 * (5 + 1) / 2
 = 15

This is the number by which we will divide out trading capital to arrive at a base unit for  our Martingale:

$3,000 / 15 = $200

We have five incremental entries at $400, $300, $200, $100 and $10 (the last, since price reaching $0 means game over and no more BTC trades). Multiply the base unit calculated above by the entry number and mechanically open a position as price hits that level:

no  level    pos. size    BTC
5.   $400   $1,000       2.5
4.   $300   $800          2.6
3.   $200   $600          3
2.   $100   $400          4
1.   $10     $200          20

Notice that our Martingale example, whilst crude, allows us to take advantage of the falling price by buying ever greater amounts of BTC for smaller portions of our capital. One could ask “Why not wait for $10 and then buy 300 BTC for the full $3,000?” Now, why would one ask a craven question like that…?

Market bottoms are probably the most opportune moments a trader can hope for. If you’ve read this far without losing interest or concentration, you’ve found the needle in the haystack. Institutional traders employ Martingale as a matter of routine and, viewed in this light, a major reason for the continued decline to absolute minimum should no longer be a mystery. A strange outcome of employing the powerful Martingale strategy is that one develops a great enthusiasm for market declines to structural low points. The same technique can be applied (in reverse) at market tops, but with greater caution required due to the tendency for price to spike. We’ll be sure to take explore this strategy as the next market top approaches.

Disclaimer

The analysis and trading strategy shared with readers above should be taken as an opinion and not a buying recommendation. Traders and investors are urged to consider the effect that a price decline to $260 or $140 will have on their margin accounts and to prepare a strategy for both managing such an eventuality, as well as taking advantage of this bargain buying level. The Martingale strategy outlined above does not take into account the margin costs of holding losing positions. Outright buying of “physical” BTC is not affected by this, but traders using leverage and margin accounts should take mineral supplements and do the maths – just as they always do before throwing hard earned fiat money in the market (right?)

The writer is fully invested in Bitcoin via BTC-e and formerly via Mt.Gox. Trade and Investment is risky but not as risky as some other things out there. Please take care and only buy or sell 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.

This post was last modified on 05/05/2014 03:13

Share
Venzen Khaosan @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.

Show comments

News Tip?

tip (at) ccn.com