Bitcoin Price Analysis - SEC decision looms

Everything fundamental this week takes a back seat to the COIN ETF decision. Bitcoin has been trading between $1134-1292, according to the BLX, up 72% from the low established on January 12th, 2017. The Network Hashrate gained 4.5% on March 3rd, adding 39.07% year to date.

The SEC will be obligated to comment by Monday March 13th 5PM EST, at the latest, or the COIN ETF will be automatically approved. There is little expectation of an approval, as this is the final deadline, following several extensions.

While an approval would surprise the market, it would not necessarily cause an immediate bullish move. A denial will likely cause some bearish intraday momentum, which should abate quickly. An ETF will eventually be approved somewhere.

The current pitchfork shows a probable range following the SEC decision. Each diagonal of the Pitchfork can be thought of as a Potential Reversal Zone or support/resistance line. The upper blue diagonal zone being ‘most overbought,’ or the top bounds of the trend, and the lower blue diagonal zone being ‘most oversold,’ or the bottom bounds of the trend.

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Meanwhile, there was a People’s Bank of China (PBoC) announcement this week regarding an extension of limited withdrawals from domestic Chinese exchanges. This added momentum to the 12% pullback, in a technically overbought market.

PBoC announcements are affecting the market in decreasing amounts. The January 2016 announcement instigated a 36% pullback, which we are unlikely to see again. This was a perfect storm of the market already being overbought on euphoria, and spiraling yuan devaluation. Much of the CNY volume has ceased, and local exchanges hold a significantly smaller proportion of total volume worldwide. The Chinese are now using LocalBitcoins in record volume.

Japan, the current world leader in exchange volume, has very little need for LocalBitcoins as a source of trading, which is reflected by the LocalBitcoins volume in that country.

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On a technical note, SegWit signalling remained flat, at around 26%. If Segwit is not supported by 95% hashrate by November 15, 2017, the proposal will expire. While the clock is ticking, there is certainly time to gain momentum.

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Long Term Technical Analysis

While longer timeframes always provide the overall trend, the Ichimoku Cloud indicator provides four key indicators that can offer more detail. As long as the price remains above the cloud, sentiment remains bullish. When the Tenkan (T) is over the Kijun (K) sentiment is bullish. When the Lagging Span (LS) is above the cloud and above the price sentiment is bullish.

Daily, four hour and one hour timeframes currently have mixed signals, which from an entry standpoint, is what you want to see as a trader. When all the timeframes are already leaning bullish or bearish, the optimal entry has long passed.

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One Day Chart

Technicals had been leaning overbought on the daily chart for the past week. The distance between the T and K lines is a strong indication, even without the need of an oscillator, that the current price is overbought. The Ichimoku Cloud system focuses on equilibrium, moving averages, and dynamic support and resistance zones. When overbought or oversold conditions are present, there are wide gaps between the T and K lines, a wide cloud, or the most significant, a wide gap between price and the T line.

In a healthy trend, price and the T line, which is basically a 20 period moving average, move largely hand in hand on the daily timeframe. You can see this on the chart from November 2016 to December 19th 2016. After that period, price moves significantly more violently, both in the bullish and bearish direction, as it is continually trying to return to equilibrium.

Unfortunately, calling the exact top of any trend is very difficult, and shorting a bull trend is foolhardy. My preferred method of playing overbought conditions in a bull market is to not open longs, or even buy the micro dips, but instead find bids at places of support on the daily or four hour time. Or, sit out completely, avoid catching knives, and look for entries after the drop occurs based on market structure and Ichimoku Cloud on the hourly or lower timeframes.

Medium Term

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Four Hour Chart

Before price breaks significant support zones, I try to find edge to edge trades and either trade them, or use them as confluence for bids/asks. Again, countertrading the trend is ill advised, but certainly doable. The edge to edge trade conditions began once a candle closed inside of the cloud. Price bounced on support at $1130 almost exactly as the four hour cloud predicted.

As we stand, price is in the cloud, which means the trend is indeterminate. I consider this a no trade zone. Obviously, this does not mean you should not trade at all, as lower timeframes will have actionable signals as price recovers or continues to pullback.

A kumo breakout, where price closes above or below the cloud, would be a strong indication of an entry signal one way or the other. The target of the bearish kumo breakout to the downside would be the horizontal support of the daily kijun. If you are a trader who solely plays the higher timeframes, the four hour cloud is telling you to sit tight for now, out of position.

Short Term

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One Hour Chart

Price is currently below cloud, with a short entry signal when price first closed below the cloud, around ~$1200, and a second short entry signal when price re-entered the cloud and closed below cloud and kijun, around $1230. Traditionally, a TK cross would be the exit signal for the trade. As I stated above, I had no plans of shorting this, so I was and am looking for market structure suggesting an interim bottom has formed.

These chart patterns would include a double bottom, inverted head and shoulders, or a three drives pattern. A TK cross would add to the confluence of the price pullback being close to complete, if not over entirely, and a kumo breakout on the one hour time frame would suggest resolution of the pullback.

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Fifteen Minute Chart - Three Drives Prediction

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Thirty Minute Chart - Three Drives Completion

The three drives pattern is a type of harmonic which has three equal pushes up or down, followed by a push in the opposite direction. The third target can be predicted once the second push completes, or can simply be measured after all three waves are present. The more symmetric the waves, the higher the probability the pattern will reverse as expected. The stop loss for this particular trade was based on a previous down wick on the same timeframe.

There was also a declining volume profile which creates a divergence, which means that although price continued to move lower, it did so on lower and lower volume, which would suggest a reversal of momentum, or weakening of bearish momentum. The target of any three drives pattern is between the 50% and 76.4% fibonacci retracement levels. I usually set my target at the 61.8% fibonacci retracement.

The three drives pattern, which among all the exchange charts looked the best and most convincing on the $BLX index, was what I decided was actionable enough to trade. As someone who searches for actionability in chart patterns, using an index that smoothes data between the exchanges is very helpful, especially for eliminating oddities from a thin orderbook on certain exchanges, which creates an untrue market structure at times.

The current active pattern is an inverted head and shoulders with resolution at $1283. Should price break both the neckline resistance AND the cloud, this target would increase in probability significantly. It is important that the pattern also has a descending volume profile, which suggests consolidation to a bigger move. Completion of the pattern occurs when price breaks the neckline on significant volume. Trading patterns before they complete is highly risky and often results in a losing trade.

Conclusion

The ETF decision will likely be a no from the SEC.  will come eventually, and will be incredibly bullish for price long term because of the access it will provide. Lest we forget, the ability for most people to trade on many exchanges around the world is quite burdensome. Until the SEC decision, and even after, I’ll focus on something I can better predict and understand, the technicals, which continue to show a healthy bull trend.