Bitcoin Price Analysis — Buy the Dip

Petar Zivkovski, 14 Mar 2016 - Analysis, Bitcoin, Price

Petar Zivkovski has a Master’s Degree in Mathematics and Computer Science. He spent 10 years trading for BlackRock before assuming his current role as the director of operations at Whaleclub.

The technical setups posted below use simple trend detection, support and resistance, channels, pattern and candle analysis. We aim for high-probability trade setups on BTCUSD, and use very few indicators. All charts use BNC’s Bitcoin Liquid Index for maximum accuracy.

The timeframe for trades is 1 to 7 days, so we’ll use 4h candlesticks. Bitcoin is best traded as a purely speculative commodity on 4h+ timeframes, although I’ll briefly describe a shorter-term scalp setup.

Market Sentiment

This section is based on internal (anonymized) Whaleclub trading data and is published exclusively on BNC.

Current Active Long vs Short Volume Ratio: 4.6:1

Average Active Long vs Short Volume Ratio: 2.4:1

We have a 90% excess in active long volume relative to the average. The average weighted long entry price is $417.62, which is only slightly higher than the current market price.

Sentiment is bullish, although longs are slightly underwater. The risk of a long squeeze is above-average due to the high long ratio, and this risk will increase if price continues to drop. A broader long squeeze may take effect if price breaks down below the key $400 support level.

Macro Key Points

This section is an overview of news headlines or events that may affect BTCUSD.

There was not a huge amount of media coverage for bitcoin this week. Most trading volume was focused on the ETH/BTC and ETH/USD pairs which garnered significant attention as ETH broke its all-time highs several times in the span of a few days.

News developments that may affect BTCUSD:

  • Bitcoin Classic is running on the majority of nodes. This is bullish as bitcoin holders anxiously await a solution (even a temporary one) to the block size quagmire.

  • launches a micro-payments marketplace, where machines can use APIs and pay with bitcoin based on usage. Machine-to-machine payments have long been hailed as a bitcoin killer app and this is a significant step in that direction.

  • Reports of blocks filling and thousands of unconfirmed transactions underscore the fragility of the network and the importance (and imminence) of resolving scaling issues.

  • The halving occurs in under four months. The extrapolated post-halving bitcoin price, based on current market price and assuming demand for bitcoin remains the same, is about $205. This may sound inexpensive to many observers who will be looking to go long.

Technical Analysis - 4h+ Timeframe Setup

Let’s start by determining key support and resistance levels on a higher (daily) timeframe. We find that price is resting on a daily support area around $410.

14 March 2016 chart 1As for trend lines, we have both supporting and resisting levels, which signal that price is in a relative squeeze in a triangle formation converging around the $430 level, with current lows at $400 and highs at $450.

Now let’s switch to the 4h timeframe to dig a little deeper. Our daily trend lines and S/R levels are preserved.

16 March 2016 Chart 2

We see that we are pretty much sitting on double support with a 4h pennant squeeze restricting significant price moves for now. This price squeeze, however, should set us up for a high-probability breakout trade which can be either long or short. Double long-term support from the 4h trendline and the $410 level are indicators that have us leaning toward a bullish breakout.

Technical Analysis - Scalp Setup

Let’s see if we can identify a good scalp setup on the sub-hourly timeframes.

Betting on a continued ping-pong movement of price, and assuming macro events do not suddenly change or catalyze, we can long support and short resistance inside our smaller trend line pennant formation, giving us $5 moves to trade.

16 March 2016 Chart 3

Trade Ideas

The technical view indicates a shy long with an approximate $445 price target. I say “shy” because the market is not trending (it’s ranging and we generally want to avoid ranging market trades). Set a relatively tight stop around $408 because a breakdown of trend line support would invalidate the trade.

16 March 2016 Chart 4

A higher-probability trade would be to wait for a dip before going long. This dip would represent weak longs closing into large bids (remember that sentiment is overwhelmingly long, with some longs underwater, so a few of those longs are certainly ready to panic close). This may result in a wick below our 4h trend line support - a wick that should be bought. The dip would also signal a trendier market which is always better to trade than consolidation.

16 March 2016 Chart 5
This trade is invalidated if we break and stay below the daily trend line support around $400.

Shorting is not recommended unless $400 support clearly breaks. Even then, with the halving on the horizon (bitcoin supply is halved this July), a long-term short is a risky bet.

Disclaimer: This is not financial advice. The information presented in this post is an opinion and is not purported to be fact.