Is Bitcoin Ready To Breakout? Key Metrics Suggest Caution

Before the FTX debacle Bitcoin was on a positive roll. From the 21st of September to November 2nd, for example, the price of BTC rose by ~13%. While a number of moving average indicators suggest that Bitcoin is oversold, others make for bleak reading. Carl Medawar, lead trader for Techemy Capital notes in a recent price analysis video, that Bitcoin really, for the first time in history has traded below its 200-day moving average for more than three months. He says this suggests price depression and unless Bitcoin can get above its 200-day MA (which currently sits at US$24,665) the buy/sell signal for Bitcoin remains bearish.

The chart above shows the long-term BLX price versus the 200-day Moving Average (Blue line). It visualizes the historical period of underperformance that BTC is going through.

Medawar notes that a number of fundamentals point to a potential Adam & Eve double-bottom pattern forming for Bitcoin.

Short-term Bitcoin Trading Opportunities

Source: Tom Bulkowski

In the last two months, there has been a clear Adam & Eve double bottom pattern forming for BTC

The conditions for an Adam & Eve double bottom are as follows:

-There have been two distinct valleys in the last two months. The first pattern, the Adam valley is generally V-shaped with a price spike, while the second Eve valley is more rounded.

-The rise between bottoms should be at least 10% and tall patterns tend to perform better.

-The price variation between bottoms should be small, each valley should appear around the same.

-The confirmation occurs when the price closes above the peak between the two valleys.

-Volume on formation is larger on the left valley.

The pattern seems clearly identified following October 26th when Bitcoin closed at US$20,776.77. This appeared to confirm the Adam & Eve double-bottom formation.

We see the two clear valleys, a sharp one on the left, followed by a rounded one on the right. From 1st bottom, the price of BTC rose from trading at ~US$18245 to ~US$20429, an 11.97% rise. From the 2nd bottom, it rose from ~US$18238.73 to trade for US$20,992, a 15.10% rise. This meets the 10% bottom-to-peak requirement for an Adam and Eve pattern, although it likely cannot be considered tall. The two bottoms are also very similar prices, the volume is also clearly much higher on the left valley than the right.

The timeframes for the valleys are ideally two months, however, things tend to happen more quickly in crypto. The length of each valley is about a month.

How to Trade a Bitcoin Technical Pattern

The next question is how should this pattern be traded and what are the target prices? A straightforward way to trade a technical pattern is a measure rule. A rule-of-thumb style strategy that relies on the high and low points of the chart and some numbers that can be based on experience. Here we use Tom Bulkowski’s cheat sheet (the author of the Encyclopedia of Chart Patterns 2nd Edition), to write up the targets.

H+ (H-L)*69% – Where H is the highest price on the pattern and L is the lowest price of the chart. In this case we would get a price target of

20,992 + ((20992-18240)*0.69) =

20,992 + 1898.88 = 22890.88

Broadly it appears that based on Bulkowski’s assessment of the Adam & Eve rules of thumb, Bitcoin is not set for a major price rise post this double bottom. Bulkowski says to expect strong post-break-out performance if:

• The double bottom appears after a long, flat base (assessed based on a weekly scale)

• There was a short-term decline in the lead-up to the double bottom

• It occurs within a third of the yearly high

• A downward volume trend precedes the pattern

None of these conditions have been met, so it is unlikely that BTC is set for a major breakout, at least based on this technical pattern. Additionally, because each valley is short and the price movements are relatively small, it is difficult to back a major price rise in this situation.

Nonetheless, another popular technical signal does points to Bitcoin being ready for a breakout.

Bollinger Bands are a technical indicator developed by John Bollinger and they are used to identify overbought or oversold market conditions.

They primarily focus on volatility and how loud or quiet a market is. The inner and outer bands measure upside and downside volatility. The Bollinger Band calculations include a moving average price, a typical price, and standard deviations away from that typical price.

There are two basic structures for Bollinger Bands, tight or wide apart.

When the price is quiet, the bands close together and become tighter. When the price is volatile and loud, the bands split and move wider apart.

The general idea of the Bollinger band is that over time price tends to return to the middle of the bands. This is why we have Bollinger Bounces where prices bounce off the band and return towards the middle, a classic trading setup that focuses on the formation of M and W patterns.

A classic Bollinger band setup is a W-Bottom. A W-Bottom forms when the second low on a potential W is lower than the first low but holds above the lower band. Traders begin to take notice of the pattern when the price begins to rise off the lower band and returns toward the middle. When it pushes past the high of the first pullback the W pattern is confirmed and a trader can prepare for a breakout.

The other primary setup for traders is the Bollinger squeeze. When bands squeeze together, this suggests a breakout or a rise in volatility is about to happen. If the candle is starting to break above the top band, then a breakout, driven by a rise in volatility may be set to occur.

The next question is if a breakout appears imminent, which direction will it follow? Bollinger recommends looking at some other indicators and if they are moving in the opposite direction to the price, it may signal a bullish divergence and possible upside breakout.

The price of Bitcoin has recently crossed above the top band after a period of tightness (in line with a 6-month low width). This is a clear sign that a bullish continuation and potential breakout in price may be incoming.

What traders need to be mindful of, however, is a potential head fake. It is not uncommon for Bitcoin or other cryptos to turn in one direction, seemingly teasing traders into a trap, and then reverse course and make a significant move in the opposite direction.

Two of the indicators Bollinger recommends looking at to see if there is a bullish divergence are the Relative Strength Index (RSI) and On-Balance-Volume (OBV).

There are two factors why a trader may feel like a head fake will occur with the current BTC break above the upward Bollinger band.

Firstly, RSI appears to have already peaked and is beginning to drop, it would be preferable if it was in an uptrend. The other issue is volume, this article from stockcharts indicates what a trader ideally hopes to see in the lead-up is a trend growth volume as suggested by an indicator like On-Balance-Volume (OBV).

This large Bitcoin (BTC) Bollinger squeeze in July 2020, has some similarities to the current price position of BTC though it appears more bullish.

RSI appears to have topped and the price looked somewhat overheated, RSI wasn’t dropping the way it is now but it was still very high. Additionally, while OBV didn’t signal strong momentum it was still in a stronger uptrend than it is currently in.

Conclusion

The biggest difference between 2020 and now is the general fundamental state of the markets. For example, July 2020 was just a few months removed from the last Bitcoin halving. In addition, it was during the DeFi explosion which began with the launch of the COMP token on June 10th, 2020. Between July 17th and August 21st, the price of BTC surged almost 60% – from $31,000 to $49,000.

The state of markets in 2022 is very different. Throughout the year the digital asset market has traded bearishly because investors have shifted away from perceived risk assets and towards the US dollar and saving. Bitcoin and other asset classes have struggled, and the DXY has enjoyed sustained momentum, as interest rates in the US have surged.

The US 2-year, 5-year, and 10-year interest rates compared with the price of BTC, the S&P index, and the DXY. While the DXY has risen alongside interest rates, BTC and the S&P have both fallen.

Other important differences between 2020 and now include;

• Higher than expected inflation worldwide – especially in the United States and major European economies. This is triggering a response of higher interest rates and more expensive capital.
• A worse-than-expected slowdown in China driven by COVID-19 outbreaks and lockdowns.
• The spillover and production disruption from the conflict between Russia and Ukraine.

Not considering technicals – Bitcoin’s long-term downtrend will likely be difficult to break until some of the bearish macro tailwinds clear.

About Techemy Capital

Techemy Capital is a bespoke digital asset investment firm.

It offers financial & technology solutions for professional investors: funds management, OTC, yield optimization, and investment intelligence. The firm has been active since 2013 and is backed by experience, knowledge, and proven capabilities.

This analysis supports research for the Techemy Capital Holistic ETH-BTC Fund. A non-custodial fund that was launched on the Enzyme DeFi platform.

This Actively Traded Portfolio provides exposure to Bitcoin and Ethereum price action, following unique long/short trading strategies, designed and executed by the Techemy Capital in-house trading team. It is available on the Ethereum and the Polygon blockchain.

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