Bitcoin Analysis: Week of Aug 17 (Intro to Patterns)
This week Tone Vays will discern the patterns that can be formed by Bitcoin price charts and how they can affect future dynamics.
Last Week’s Review
In last week’s post we concluded with the following statement:
“The odds, however, favor more downside back to the base of the triangle at US$560 and breaking below that should take us down into the US$500-530 zone where the Fibonacci’s will have a chance to create a healthy reversal.”
Now that the price has reached our support target of US$500-530 zone where do we stand now? Lets take a look at the weekly chart.
The comment on the 61.8% Fibonacci retracement has been changed to indicate we have reached this critical support point. An additional trend line has been added that uses the bottoms of the weekly candles though it might be a bit pre-mature since the current week is not yet completed.
As you can see we are sitting at a very important point here at US$500, which we will explore further with the daily charts as usual. But it should be pretty clear from the weekly chart that if this point is lost and the price breaks down again, there is not much technical support left to hold it up and we can fall quiet a bit.
Education (Intro to Patterns)
This was mentioned in last week’s analysis and on the daily chart you see a clear example of one of these patterns, the descending triangle.
There are dozens of patterns that can be seen on the chart and even though they do not always perform as the textbooks suggest, recognizing them does give the trader a slight edge in terms of probabilities of possible violent moves like what we just saw this week.
You can find a list with examples of these patterns on many websites so feel free to do some search and become comfortable in recognizing them. One of the more popular “reversal” patterns is Head & Shoulders, but one that is a bit harder to recognize is a Cup & Handle and perhaps that’s why it’s so effective.
The Cup & Handle is a “continuation” pattern similar to the triangle we currently have in the price of bitcoins, and all these patterns can generally be grouped into one of these two general categories.
Fundamentals (aka News)
Unlike the last two weeks, there have been some significant developments that might be contributing to this fall. Rumor has it that the declines in bitcoin’s price generated a Margin Call at the exchange Bitfinex that allow leveraged Trading. We will not get into the details of a Margin Call here but in short this could end in the broker taking away the position and selling it on the open market. This appears to have been a large position of about 9,000 btc, which in a not so liquid market can have drastic affects and cause panic selling on other exchanges.
Of course this could have been one major player deciding to crash the market by selling a market order of that size. This just goes to show that you have to be very careful if you are to engage in this trading or hold a substantial amount of wealth in bitcoins.
Another big piece of news is that there was a major hack for over US$1.65 Million worth of NXT coins from the exchange Bter, and news like that is never good because it can keeps some people on the sidelines from considering involvement in crypto-currencies.
There was also some positive news with more companies keeping an open mind into future bitcoin adoption including Ebay/PayPal. It is hard to see the advantage here since PayPal should go the way of Blockbuster since they did not see bitcoin for what it is like the founders of BitPay and Coinbase who now have a significant competitive advantage.
Also keep in mind that merchant adoption is not a net positive for bitcoin price, unless these merchants intend to hold on to the bitcoin and use it in commerce like paying employees and their suppliers, immediate liquidation of large/consistent purchases can put pressure on the market.
We will continue this view of a 1yr look back for the time being to capture the last great exponential rise. Once again we are referencing Fibonacci Retracements and a few Trend Lines which were recently broken.
The descending triangle clearly followed the textbook breakdown, but there can still be more pain. If you read the Educational section above, it indicates that the down move should be about the same size as the height of the triangle, which is about US$120. So a reasonable target might be the US$440, which happens to be the area the trend line breakout back in May. Nothing however goes straight down. Clearly there was some panic selling the last few days and it’s very likely that the price will come back and hit the bottom side of the triangle which now acts as resistance.
A closer look at the last few months is showing that the volume over the last few days was pretty substantial and is even greater then the US$100 drop back in June. This is not a good sign for an immediate price reversal. The candle that formed today appears to be a Doji, which tends to signal a reversal but it needs confirmation this is achieved with a higher close above the previous days high. So a close Saturday over US$520 will be the first indication that the panic has subsided.
We are at a very critical juncture right now with the price at US$500. This major support is being heavily tested. We all want the price to stay flat or rise so a reversal here would be ideal. If the price stays below this level for a few days or we start seeing selling into the US$470’s creating new lows, our next level of support is the US$440-450 zone.
The odds, however, do favor a bounce right here at these levels. The size of this bounce is hard to judge, but we are looking pretty oversold at the moment. Let’s see if the weekend will come things down and we at least come back to the breakdown level of US$560 and re-evaluate the situation then.
Reference Point: Friday, Aug 15 10:00 pm ET, Bitstamp Price - US$495
About the author
Tone Vays is a 10 year veteran of Wall Street working for the likes of JP Morgan Chase and Bear Sterns within their Asset Management divisions. Trading experience includes Equities, Options, Futures