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 broug