Bitcoin Analysis: Week of Oct 26 (Intro to RSI)

The week of October 26th Bitcoin Analysis by Tone Vays.

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Bitcoin Analysis: Week of Oct 26 (Intro to RSI)

Note from the Author: Please follow me on Twitter (@Tone_LLT) for additional updates to the state of Bitcoin’s price volatility

Last Week’s Review

In last week’s post we concluded with the following statement:

Our overall stance is now Long-Term Slightly Bullish, Intermediate-Term can now be considered Bullish, and Short-Term is also Bullish. Regular readers will recall how a few weeks before the big drop to the US$200’s it was stated in this series how this was the scariest charts have looked in a long time, well now we have the complete opposite. Sitting right here on the verge of breaking back above US$400 is the best charts have looked in months. Nothing is ever guaranteed, but the ideal situation right now is to break above the US$400 resistance and make new highs in the US$440-450 range to match the PayPal news hype. Then a pull back establishing a real visual low back at this US$400 zone as it becomes support. 

Since nothing is ever perfect, here are additional two cases to keep a close eye on listed in order of importance.

Bearish: Because our main view is currently very Bullish and looking for new highs, our primary concern has to be what will keep us up at night.  The low at US$370 was not deep enough to really bring in buyers like the lows a week earlier did at US$275. Some more downside to re-test this low or even drop as low as US$340 followed by swift buying is perfectly reasonable.

Bullish: Once the price breaks past US$400 and makes new highs, buyers should step in out of fear of missing out the next big rally. Watch resistance points at $420 (last week’s high and Moving Average), $440-450 (major resistance), and $500 (physiological number and a Fibonacci line)

Last Sunday the charts looked really good and we were preparing for a move back over the US$400 price, but clearly that was not in the cards. It got too as high as US$393 but was not able to break the US$395-$405 resistance zone.  A small symmetric triangle did develop and though it was not in the charts last week you will see it added to the short-term chart this week. 

Symmetric triangles can be tricky for traders. A lot of people consider them a continuation move so if one forms after some directional momentum they will break out into the same direction as the move before the formation of the triangle. But in reality, symmetric triangles are 50/50 in predicting direction but can help with the expectations on the size of the move when price does break out (or break down).

Clearly the expectation of price breaking out into the US$450 area did not happen, but as mentioned in the first case of things to keep an eye on and even specified under “what will keep us up at night.” Please read the line in bold one more time because it happened exactly like that.  For the last few weeks we were worried that this monster rally from US$275 to US$420 never created a visible higher low and without one, traders can’t properly establish another round of confident buying.

This low came a few nights ago as prices fell quickly to just above US$340 and then immediately rebounded back to US$363, but this down turn comes a bit too late and was too deep, so it is possible that investors might get a little scared as they were all set for another year end really like in years past.

Let’s take a look at the long term chart which was starting to look promising as of last week but is now once again begging to look scary as the weekly shooting star that ended up forming was confirmed this week once the price dropped bellow last week’s low.

We will hold off on declaring the Long-Term chart Bearish for one more week, and it’s unfortunate to have to flip our view this often but we can only call them like we see them and as promising as this past week was begging to look, the price was just not ready to break out. At this point, we can now add a trend line very similar to the one visible on the chart Dec-May.

Education (Indicators pt. II - RSI)

The Relative Strength Index (aka RSI) is another common indicator followed by Technical Traders as it helps identify areas of overbought/oversold conditions and also helps identify momentum in determining how much longer a move can stay on its path. A general picture is shown below but the time period can be adjusted based on the asset.

The most commonly used period for the RSI is 14 days, but as you can see in the example above it almost never indicated an overbought condition (above 70) or oversold (under 30) so in some cases it is useful to adjust this period to the volatility of the asset.

There are plenty of on-line resources that will teach you more, and just like with the MACD, a good one can be found in Chart School on StockCharts.com.  The general idea is that oversold conditions should be matched with overbought conditions though as you can see in the picture above, something can be considered overbought or oversold several times before the tide eventually turns.

Also just like the MACD, RSI is used by traders is to help spot Divergences and those examples are also present in the ChartSchool link above. Here is the visual:

As you can see, a trader needs to be extra careful when the price is indicating one thing and the RSI another. Using both The RSI and MACD in combination to spot divergence, can be a very powerful message. Obviously nothing will work even 80% of the time as desired, but when traders stay consistent with statistically proven signals that may work only 60% of time and recognize their mistakes early, this is what separates those that can do it for a living and those that cannot.

Fundamentals & News

Highflying news continues for Bticoin this week so here are the usual roundups that this analysis never misses to close out the week.

The big news came late in the week with the Sidechains Whitepaper introducing yet another Bitcoin 2.0 system. Taking a step back and looking at the Ecosystem over the last two years it is amazing at all the innovation and concepts that have been brought to the world thanks to Satoshi’s vision, but at the moment all these Bitcoin 2.0 plans are just concepts and as much as we all hope they will continue to revolutionize technology, the general public is still not comfortable with Bitcoin which is unfortunate. This news in itself should not have much of an affect on Bitcoin’s price but it is encouraging that VC’s continue to spend money.

Also big on our radar is the continued encroachment of Authorities into the Bitcoin Ecosystem with Bitstamp looking to confiscate non-registered accounts and a lawsuit being brought up against Cryptsy, who also recently signed on that dotted line and will now be part of the enforcement arm as they identify users that intend to use USD within their platform.

Bitstamp is already losing its first mover and competitive advantages to other exchanges and this move will make them even less relevant. (The charts in this series still use Bitstamp pricing but it is really time to switch to Bitfinex.) As for Cryptsy, once you begin dancing with the Devil, there really is no going back. It sure sounds like the lawsuit has some solid ground to stand on and they might be found guilty and liable in the missing funds, but that is a matter of property rights which is to be respected under any conditions and circumstances.

The agreement to now identify their user base is an entirely different matter, and this analysis does not expect it to end with USD transactions. The pressure will be on in the near future where all users are to be identified and, even though that is what the majority of the world want and accept, the herd mentality and the illusion of safely will eventually be proven wrong by the free market and the ethical companies that resist this 15 year technological trend will rise to the top.

In other news, the BitLicense comment period has ended, and as most expect very little will be changed. Obviously any regulation will hurt the smaller players the most and something like this will give huge advantage to Wall Street players looking to step in and dominate the industry. So here we are, as the current small companies get bombarded with expenses, will new players enter the Ecosystem and bring new users with them?

If the answer is yes and these players arrive with lots of money, there will be a lot of happy Bitcoiners come these holidays. But on the other hand, if all this regulation does is chip away at current establishments while the big boys still see Bitcoin as a joke, there might be some more price pain until some break through in one of these 2.0’s really brings it home or the Financial horrors of 2008 rear it’s ugly head once a gain since statistically we are due.

“Most do not realize, but the recovery from the 2008 Financial Crisis has now lasted significantly longer than the recovery from the Dot Com Crisis. How long the Fiat Ponzi will last is still anybody’s guess so here is mine: November 2015.”

                                                           - Tone Vays

Perhaps it’s best to separate Fundamentals from News, so here is a brief on Bitcoin’s fundamentals. They are the opposite of the Fiat system so anything crazy or annoying the banks or enforcement agents do to common citizens, the brighter Bitcoin’s future.

Here are some examples: stories are starting to pop up about banks no longer accepting cash for deposits. Yes, it always starts in an innocent way like only affecting deposits into other people’s accounts but it’s the trend that matters. In their mind, Cash = Evil, which fits well with all the stories of Law Enforcement simply taking your cash because they feel like it.

This was described very nicely by John Oliver’s show and is always highlighted by Martin Armstrong on his world famous blog. Not to mention the IRS just taking all your business’s money just because they feel like it. These are the kind of stories that are encouraging for Bitcoin’s future.

Encouragement of the Week: Japan taking a hands off approach to regulation and letting the Bitcoin Ecosystem make the calls, but in typical Government fashion, they will take their pound of flesh in the form of an 8% tax.

Worry of the Week: Gavin Andresen discussing the future of Bitcoin’s scalability which brought about the discussion of a possible fork when the time comes to finally increase the block size. Taking it one step further, the biggest worry is that the changes to the core code will be similar to the Bills coming out of Washington. Where there is one main idea that is labeled necessary, but in order to pass it there are numerous other things along for the ride that lead to dangers down the road. Also the standard practice of naming things the opposite of what they really are like the Free Trade Agreement, or names of departments like Defense, which is 90%, offense and 10% spying.

Daily Overview

Here is our 1-year Daily chart still referencing Fibonacci Retracements and a few Trend Lines broken back in July.

This is a very interesting time for the price of Bitcoin when looking at the chart above.  After 3 months of doing this series, this might be the most difficult call one has to make to make. So we will leave it at that, for the moment there is no call. There are two equally likely technical choices. The US$330-$340 is support - it was discussed here several times and the expectation was that if this level gets broken to the downside, we would crash all the way to about US$265 and that call was off by only $10.

So here we are again. If this level goes, down we go, but this time, the US$300 level is even more important because of the BearWhale. A lot of people bought bitcoin at that time and many of them will sell and get out break even before they are willing take substantial losses bellow that level. It is very important for this area to hold and hope to re-evaluate the situation on a rebound back to US$400.

The Short-term chart is fully in line with the intermediate term, which should be common since they both depict daily candles. We are sitting just above major support in the US$330-340 zone and the first hurdle to get over is the US$363 mark, which will be highlighted in the hourly charts for those that follow me on Twitter @Tone_LLT.

You also notice the symmetric triangle mentioned in the opening, which according to the rules should have reached a target of just under US$330. The hope of that triangle breaking upward and reaching the US$440 was not in the cards. Also notice the RSI, which has now indicated major oversold conditions since mid-summer. Also sticking to our Education on indicators, notice the RSI divergence that took place with the lows in mid-September and early October, as the price made new lows, the RSI had a noticeably higher low.

Conclusion:

We are as neutral across the board as can be, with the Long-term chart looking borderline Bearish once again. What looked like a great buying opportunity and continuation of momentum from early October has fizzled away.

There are definitely positives to point to in that the demand in early October was something we have not seen in 6 months and if we turn right here at these US$330-340 support levels we should have established that textbook higher low that we were hoping for prior to the move up to US$420. The ideal course of action right now might be to just wait and see if this week’s lows are here to stay.

Since we are calling the current conditions 50/50, here is what to watch for in no particular order

Bearish: A fall bellow the US$340 will likely bring about lower prices.  Support levels under that are $330, $300 and the US$265-275 zone… don’t even want to think about what happens below that.

Bullish: The first small hurdle is the US$363-$365 area that has been touched on two small rebounds this past week.  Once that is broken to the upside some momentum should set in and the next level of resistance is the US$385-400 zone where we got stuck for almost an entire week. Breaking that takes us to new highs at the US$440-450 resistance zone

Reference Point:  Sunday 11:50 pm ET, Bitstamp Price US$355


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 and more recently Crypto-Currencies. He is a Bitcoin believer who frequently helps run the live exchange (Satoshi Square) at the NYC Bitcoin Center and more recently started speaking at Bitcoin Conferences world wide. He also runs his own personal blog called LibertyLifeTrail.

Disclaimer: Articles regarding the potential movement in crypto-currency prices are not to be treated as trading advice. Neither CoinTelegraph nor the Author assumes responsibility for any trade losses as the final decision on trade execution lies with the reader. Always remember that only those in possession of the private keys are in control of the money.

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