Bitcoin Price Analysis – consolidation ending

Bitcoin has essentially remained flat for the week, and it is no coincidence that price action has slowed as a protocol altering event, UASF/BIP148 approaches. The spot price appears stuck in heavy triangular consolidation. Traders will note the descending volume profile, and expect a heavy spike in volume upon resolution of the consolidation.

The Bitcoin network hash rate briefly spiked above 6 trillion GH/s after the last difficulty adjustment on July 2nd, and has moved lower in recent days. There has been a subsequent -0.43% difficulty adjustment, the first negative adjustment since October 22nd, 2016.

The number of nodes signaling support for a UASF continues to rise. Currently, 17% of core nodes are signaling their support, leading up to activation on August 1st.

The SegWit2x beta was released on June 30th by Jeff Garzik. Luke DashJr, a bitcoin core developer who did not contribute to SegWit2x, described the entire project as a tactic to “try to stall SegWit longer” in his recent Medium post. The other core developers remain staunchly opposed to SegWit2x. Mining pools continue to strongly support SegWit2x. The code itself remains largely untested, and the community largely unprepared for a hard fork, but ready for SegWit.

Technical Analysis

Symmetrical triangular consolidations, in an already established trend, typically represent continuation via re-accumulation, and are known as pennants. This is a key pillar of Wyckoffian logic known as mark up.

However, until the direction of the breakout is clear, and due to the proximity of the UASF on August 1st, it is important to have a road map for various outcomes. Consolidation of this duration does not resolve in slow small moves, it typically resolves in large explosive moves. Below, I present evidence for both a bullish and bearish resolution.

I use Bollinger Bands to help determine when a post-consolidation move will happen, not necessarily the direction. The Bands represent one standard above and below the average price over the selected period, with the default being 20. A squeeze in the Bands represents price compression.

Typically, if price remains above the median during the squeeze, this forecasts a bullish resolution, and if price remains below the median during the squeeze, this forecasts a bearish resolution. As was the case prior to the Bitfinex hack.

There are also scenarios which Bollinger calls “Head Fakes,” which are essentially fake breakouts in the opposite direction of the eventual resolution. One such head fake occurred after the 200+ day consolidation in May 2016, on low volume.

I mention this because it is something to watch for in the current triangle consolidation. The Bands on the daily timeframe, with the current price and using the same settings as the two above examples, are not nearly as compressed. This suggests further compression may be needed until resolution. There is however a definite bearish bias due to the position of price relative to the median line (red).

The Bull Scenarios

The Ichimoku Cloud is a constant, auto-drawn indicator which quickly offers an immense amount of valuable information on any time frame. The Cloud is best used at higher time frames as more data generally provides more accurate signals and less false positives.

The indicator uses moving averages and dynamic support and resistance to make projections of key zones, as well as capturing 80% of any given trend. As long as the price remains above the Cloud, sentiment remains bullish. Price in the Cloud indicates a neutral trend, and below the Cloud indicates a bearish trend.

When the Tenkan (T) is over the Kijun (K) sentiment is bullish. K over T would indicate bearish sentiment. When the Lagging Span (LS) is above the Cloud and above the price sentiment is bullish, below the Cloud and price would indicate bearish sentiment.

The best entry signals for the Cloud occur when the trend is obvious, but 1 or 2 of the signals have yet to become confluent with a higher time frame trend. The current bullish entry signal I’m watching is the TK recross on the daily timeframe Ichimoku Cloud using the 10/20/60/30 settings. I typically use 20/60/120/30, but if price volatility has creeped to a halt I prefer faster signals.

The prior TK recrosses using these settings have been near the relative bottom of their respective trends. However, the TK recross prior to the Bitfinex hack, during a triangular consolidation period, did not resolve bullish.

The first target for any TA setup should always include Fibonacci Extensions 1.272 and 1.618. From high to extreme low, this yields targets of $3550 and $4300.

Should the current consolidation resolve as a bull pennant, targets would be the measured move of the pole upwards as well as the 1.618 Fib Extension of the consolidation. This yields a resistance zone of $3400-3600. Note the the pole measurement and fibs here are conservative in contrast to the large capture Fib Extension zones on the above chart.

Unlikely, but worth mentioning, is a long standing Cup and Handle with targets of $4800-5100 based on the fib extension and measured move respectively.

Although the resolved Inverted Head and Shoulders never materialized, the target remains at $3200.

The Pitchfork is showing strong support at the 0.75 diagonal. The median line (red) of the Pitchfork gives the expected mean of the trend. Price will continually attempt to return to this diagonal. Each diagonal of the Pitchfork can be thought of as a potential reversal zone or support/resistance line. The upper yellow diagonal zone being ‘most overbought,’ or the top bounds of the trend, and lower yellow diagonal zone being ‘most oversold,’ or the bottom bounds of the trend.

A rise to the median line would yield a target between $2900-3100, which is essentially the current all-time high.

The Bear Scenarios

Besides the above mentioned Bollinger Band break down, there is also a bearish entry signal known as an Edge to Edge trade (yellow). Should price close in the cloud, there is a high likelihood that price reaches the other end of the cloud at the very minimum.

There was a similar setup for this prior to the Bitfinex hack which resulted in a touch of the 200EMA.

While the following signals are not outright bearish, they do represent support targets. Firstly, price has never closed below the weekly timeframe Kijun or the daily 200EMA for the entire trend.

Secondly, price has also not touched the Median Line of the longstanding bullish Pitchfork for quite some time. A dip this low, back to previous All Time Highs, would be considered mean reversion and is currently unlikely. This would likely be the ultimate bearish destination should price be unable to recover higher.

Lastly, the yearly Pivots will also be important support zones with the R3 pivot being a likely immediate target should price break down.

Conclusion

Price is nearing the end of a heavy period of consolidation just as SegWit is to be activated on August 1st. I expect heavy volatility for both of these reasons. The technical indicators are showing several resistance targets above $3200. Further analysis shows a confluence of support around $1700-1800.