Bitcoin continues to slowly push to the upside reaching new yearly highs once again over the weekend, defying the logic of many traders. The bears simply cannot get their claws into the market for the time being, despite severely overbought technicals in what is still a heavy resistance zone.
Bitcoin remains embroiled in political infighting over block size, as has become the norm for Bitcoin over the past few years, and the current state of the shorter term technicals do not instill all that much bullish confidence at this time. Having said that, we think the main reason that the market has not made a more substantial move lower yet is that we are starting to see the economic effects of the second halving event which occurred earlier this year.
Many market participants seem to have forgotten about this seminal event which cut the miner supply in half, and has thus stifled the flow of coins from miners to exchanges As we mentioned last week in one of our BBA daily price updates, although the price still has some near-term challenges to overcome first, we think Bitcoin is in the early innings of a supply shock, possibly even a demand shock too, that could take prices significantly higher over the coming months.
Moving on to the technicals we want to take a look at the three-day chart below in order to put the recent market action into perspective. We can see that price finally broke above the medium-term supply area which had been acting as a barrier for the past two months, but it is now entering the longer term OTE short zone which can be seen below via the light red box. Another worrying feature is the ascending wedge formation that is being painted right now, which typically resolves with a large move one way or the other, usually to the downside.
Additionally, the momentum oscillators remain very overbought considering Willy and the Stochastic are still pinned above -20 and 80 respectively, while RSI is very close to being overbought and MACD continues to flatline. Also note that the volume profile leaves much to be desired given there is very thin air down to around the $450 level, which is also where the value area begins again so we cannot rule out the very small possibility of a move back down to those levels.
Having said that, there are some encouraging signs for the bulls as well, although they are a bit long term in nature than those mentioned above. Notice that as the price has broken above the supply area, it is moving above the top of the “cup” portion of the Cup & Handle pattern that we have been watching for quite a long time. Additionally, the current low volume rally witnessed over the summer is a good sign for the bulls, as is the A/D line which continues to trend higher. Finally, the 200-period SMA is still confirming the bull market and PPO remains neutral despite the steady push to the upside over the past few weeks.
All things considered, the relatively mixed bag of technicals continues to make us more cautious on the market than perhaps we should be at this time considering the supply and demand situation, although we believe it is better to be safe than sorry at least for now. Although we need to see more acceleration to the upside in both price action and volume in order to get fully on board with that theory, it is highly possible that the overbought momentum indicators are signaling strength rather than exhaustion. While we think there could be a short-term upside to just above $800 in the near future, we also think a retracement back down into the low to mid-$700’s would be welcome and healthy.
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