Bitcoin Analysis: Week of Dec 14 (Bollinger Bands)

Note from the Author: After spending time with the Australian, New Zealand and San Francisco Crypto-Currency communities, it’s time to get back analyzing. Please see (@Tone_LLT) for more timely updates throughout next week.

Last Week’s Review

About a week and half ago we concluded with the following:

It is nice to see Bitcoin stable for a short stretch of time, even if it is at these low year over year levels. We are tentatively bullish across all time frames and hope to see US$400 broken in the near futures as it rallies to US$450 and perhaps even US$500 into year end.

Two scenarios in order of higher probabilities

Bullish: Since the overall case is bullish, it might be more fitting for the first alternate scenario to be simple consolidation into Christmas. There is a very likely chance that price will remain between US$375 and US$425 for a decent amount of time.

Bearish: The descending trying is still not something you want to see on a daily chart. It is suggesting a price drop to just under US$300. We would need to rise above US$400 in order to remove this possible target from our charts.

Two weeks of stable prices in the US$375 range have finally shown its colors and it was once again a disappointment. The Short-Term chart at the end will show the clearest picture as the 50-day SMA played a major role in the last few weeks. Since Mid-July as the price fell below this average, it has been the perfect indicator and other than a trader induced rally in early November creating a big head fake that threw charting in disarray, it might once again be indicating lower prices. As important as the Microsoft news was for the technology industry in general, it was simply a small bump up that has already been neutralized by selling pressure.

Let’s glance at the long-term chart, which has been pretty uneventful over the last few weeks but it should indicate a direction fairly soon.

The chart is technically still Bullish, but it is not at all encouraging. We are now sitting near the lows from the day we broke above the descending trend-line. If the price does not rebound higher soon and we fall under US$340, it can get ugly in a hurry. That same descending trend-line could act as support but with every passing week it gets lower and lower and is starting to suggest that we could fall back into the high US$200’s.

Education (Bollinger Bands)

Today’s Technical Analysis sections will be short and sweet since there is plenty of news to get to and it is pretty basic in nature. Bollinger Bands rely on a statistical calculation known as Standard Deviation, which is a measure of Volatility. In a way it’s a dynamic view to identify oversold and overbought points based on the prior history of price swings.

You might see Bollinger Bands used quite often in standard technical analysis, but in reality it is a very tricky indicator.  Yes it will point out the obvious as to when an asset is at levels of high volatility vs. low, but traders use it in very different ways. In the chart above the line in the middle is usually referred to as the middle band and represents a moving average (typically it’s the 20-day Simple Moving Average). The upper and lower bands are usually 2 Standard Deviations from the mean but they can be adjusted to fit the asset being traded.

So how helpful is it? Well, this is where this indicator can get traders into trouble and why it should never be used in isolation. Some will consider buying the asset once it hits an oversold level expecting a bounce to end once it hits an overbought level (and vice versa). Others like to trade in the direction of the band and quite often once the asset hits the upper or lower band, it tends to ‘ride that band’ for an extended period of time. Also in many instances, as visible on the chart above, an asset can constantly bounce around between the Middle Band and one of the extremes.

You can learn more about strategies of trading using this indicator from Chart School or other sources, but the recommendation from this trader is never to use it in isolation. It is a good way to visualize the volatility of an asset and unless it has historically been consistent on something that is clear as day, just save it for informational purposes only.

Fundamentals & News

Once again there has been plenty of news and as usual we present 3 good roundups for those too busy to keep up with it all:

The obvious place to start is of course Microsoft. Their innovation days are long behind them (Apple is getting there) so it is fitting that they would dip their little toe into the Bitcoin infused water for some PR and first hand experience in the decentralized future that will one day hit these tech giants like a ton of bricks.

Fortunately for the world Bitcoin is not some start-up that can be bought or taken over. As for this news influence on price, think PayPal announcement but smaller, since this will only apply to the App Store. The initial pop was in line, though it was very disappointing that it only moved the price up a max of 8%. Even the futures exchanges were up to US$380 so there was definitely a higher expectation. In the intermediate term, this move is somewhat bearish for Bitcoin since just like most companies they will simply convert to fiat currency on the open market, but in the long run, it does make it easier to convert the public and make them more comfortable with Bitcoin.

Let’s just be ‘frank’ here, until more companies actually embrace bitcoins and use them in the way they were intended or the European Banking crisis is on the front pages of the papers once again, Bitcoin will continue to struggle on every level.

The rest of the news is not as critical, but some less popular stories definitely stand out when reading between the lines. LocalBitcoins closing their doors in Germany is a bad sign. They do not even sell bitcoins: all they do is connect buyers and sellers and if it’s that easy to scare a website, it’s a giant cry for the creation of an entirely new ‘decentralized’ internet structure, but most readers of articles like this already know that.

The SEC now smells blood as they have found an entire industry to fine and justify their existence. Imagine a situation where the SEC would go after a traditional fiat company; fine them every penny of profits the company has ever made and then another fine on top of that. Perhaps there were users defrauded by these entities, but I definitely don’t recall that to be public news. It’s always a mystery where the profits from these fines go because they sure do not go anywhere useful. For more on these types of situations, it’s strongly encouraged to watch the following investigative report into Civil Forfeiture.

Russia is o