Bitcoin Price Analysis – Retesting all time highs

The Bitcoin network and price has been heavily influenced by Bitcoin Cash (BCash) and SegWit activation over the past few weeks. It is no coincidence that BCash was launched to directly compete in this manner.

The market has been struggling to continue to price in SegWit, a protocol improvement that lends itself to better network efficiency, and BCash, an attempt at direct competition to Bitcoin. This hypothesis can be evaluated by comparing various network metrics of both Bitcoin and BCash.

Prior to SegWit activation, BCash rose greatly in price. The increase was driven both from a technical basis of selling volume exhaustion, and likely a concerted effort to pump the price to increase mining profitability.

By doing so, miners who are coin agnostic moved their hash rate to BCash network for a better return. This activity may have also represented a specific mining pool or group of mining pools with an interest in the health of BCash.

In the meantime, transactions fees being paid to miners on the Bitcoin network are currently extremely high. BCash was created due to this very reason.

However, this may represent a ripple effect of network stabilization from the drop in hashrate creating a backlog in transactions. Although the backlog has been worse in the past with fees not as high, this was when Bitcoin was at a lower price.

The previous all time fee high was around the same time of a large temporary decrease in Bitcoin hash rate, before a difficulty adjustment occurred. This meant that average block confirmation times increased greatly, to above 16 minutes, and total possible transactions on the network decreased.

But hash rate has since rebounded, which should stabilize the network. Block size remains below the 1MB ceiling, which should be broken soon as SegWit is now active. This will in turn lower fees in the near term, making mining the chain less profitable.

Technical Analysis

The most basic analysis focuses on finding zones which are ranging versus zones with price action. Ranging zones can be thought of as zones of support or resistance, sometimes called orderblocks. There are buyers and sellers ready to jump into the market should it reach that zone again.

The recent increase occurred $200 above the previous orderblock, indicating the strength and momentum of the existing trend. Should a pullback occur, expect a stab into the ~$3150-$3470 orderblock.

Adding Fibonacci extensions, you can also estimate suggested support or resistance at the 1.618 fib, after measuring the extreme high and low of previous price action. Based on the two previous zones, there is fib resistance between ~$4800-$5000 on the next leg up. Expect the $5000 psychological barrier to hold, or a strong retrace from that level. Beyond the $5000 barrier, fib extensions suggest ~$5600-$5800 as the next pitstop.

Whenever the health of a trend is threatened, it’s important to fall back on what you know, so you are not driven by emotions, but rather, a tested and proven system. My favorite indicator for diagnosing the health of a trend is the Ichimoku Cloud.

The Cloud system 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.

On the daily timeframe, despite the distance from price to the Kijun, which signals heavily overbought conditions, a Kijun bounce has yet to occur. There was a perfect Tenkan bounce, which traditionally signals strong continuation, ie, the trend is so strong, mean reversion cannot even occur. It is important to consider price as overbought despite an attempt at an ATH test. The Kijun remains a valid pullback target if/when that should occur.

On the four hour time frame, there was a bearish TK cross above cloud, a long exit signal (red arrow below). This assumes you were not already stopped out using other indicators, such as Heikin-Ashi candlesticks or Bill Williams’ fractals. Additionally, there was a short entry signal when price closed inside the cloud. I refer to this as an edge-to-edge trade. The target for these trades is always the opposite end of the cloud, which can be thought of as the next rung of support.

This target zone was essentially hit, and price bounced quickly. As with any support or target, it’s important to place entries or exits +/- a few dollars from the target for this exact reason. Currently, there is no indication to re-enter a long based on the four hour time frame, as there has not yet been a bullish TK cross (green arrow).

If getting out and back in a trade so quickly seems like a wasted opportunity or overtrading, consider that Cloud only aims to capture 80% of the trend. You can always buy, hold, and hope for the best. The Cloud helps mitigate risk by signaling reliable entry and exit signals.

There was also a 50/200EMA cross on the one hour time frame, another version of the bullish entry signal, at about the same candle as the Kumo Breakout. This can be considered confluence for a long entry.

Another trend following indicator is the Pitchfork, with an anchor drawn from the July 16th low. The median line (red) of the Pitchfork gives the expected mean of the trend. Price will continually attempt to return to this diagonal, around ~$4600.

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.

Conclusion

With SegWit approved the bitcoin network can now handle more transactions per block and therefore more transactions per day. For many, this is an important metric for understanding the value of the network as a whole. Technicals suggest at the very least a retest of all time highs, with $5000 being a likely new record very quickly.