Bitcoin Price Analysis - SEC disapproves ETF

The U.S. Securities and Exchange Commission (SEC) made history on Friday by disapproving the Bats BZX Exchange filing to list and trade shares of the Winklevoss Bitcoin Trust. The shares, representing 0.01 BTC, would have tracked the price of bitcoins on the Gemini Exchange. The digital-asset exchange is owned and operated by the Gemini Trust Company, which would have owned the equivalent share value in bitcoins.

The Commission believes that the significant markets for bitcoin are unregulated, which means they are unlikely to approve any US based exchange-traded product using bitcoin as the underlying asset. There was a 25% drop from the high that day, which was a brief new all-time high of $1319.50 on the $BLX.

Aside from the ETF, this week’s big conundrum was the increasing support among large Chinese miners for Bitcoin Unlimited, a counter proposal to Segregated Witness (SegWit), spearheaded by Roger Ver, which would remove the block size cap entirely through a hard fork.

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SegWit would increase the block size by up to 4MB through a soft fork. A hard fork would split bitcoin into two different cryptocurrencies, whereas a soft fork would be backwards compatible. Many argue that a hard fork would be dangerous to the bitcoin ecosystem as a whole, the Bitcoin Unlimited code has not been fully tested, and two Bitcoin’s would create brand confusion. A zero day exploit brought down 75% of bitcoin unlimited nodes this week. While the attack vector was quickly patched,  the attack validated the concern around releasing untested code into a $20 billion asset.

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Both sides of the debate agree a solution needs to be reached soon. Blocks have become increasingly full, which increases transaction fees due to users wanting to be included in the next block, and slows down transaction times generally.

The People’s Bank of China (PBoC) has been rather quiet over the past week. Domestic Chinese exchanges remain under a withdrawal halt until further auditing is completed. Being unable to withdraw bitcoin means that many traders have been staying off the exchanges entirely.

Of note from China this week is the opening of a new quarterly futures contract from OKCoin. Below is a chart showing the quarterly contract open dates (orange), the previous quarterly moving to biweekly (blue), and the previous quarterly contract closing (yellow).

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Whether or not any true significance or correlation can be gleaned from this is difficult to say. It is safe to correlate either increased periods of volatility around the quarterly rollover dates, or complete stability which was the bottom of the uptrend at the time. The current volatility occurring before the opening of the next quarterly contract suggests a bearish forecast for the next quarterly. Said a different way, either the high or low for the quarter has been made around quarterly contract rollover dates.

However, Chinese volume and therefore China’s ability to move the entire bitcoin market has largely diminished since the PBoC crackdown. This upcoming quarter may be a turning point where OKCoin futures have less relevance than it has in the past.

Even though Chinese exchange volume remains diminished from previous months, even falling behind the South Korean Won in volume, China’s Local Bitcoin volume remains at all-time high levels. Expect Chinese exchange volume to increase substantially once the moratorium for withdrawals is lifted.

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Long Term Technical Analysis

When assessing the health of a trend or diagnosing the bearishness of a pullback, the highest timeframes offer an overview, while the Ichimoku Cloud indicator offers more detail. As long as the price remains above the cloud, sentiment remains bullish. Price in the cloud which indicate a neutral trend, and below the cloud would indicate 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 trend is obvious, but 1 or 2 of the signals have yet to become confluent with a higher timeframe trend.

For even more precision, an oscillator, such as the Relative Strength Index, can be added to determine momentum. A bearish divergence is created when price makes a higher high but RSI or momentum, does not make a higher high. This suggests weakening of bullish momentum. A bullish divergence is created when price makes a lower low and RSI makes a higher low. This suggests weakening of bearish momentum. Divergences suggest reversal of trend, however, divergences can continue growing until the reversal becomes obvious and should be thought of as a lagging indicator.

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All cloud signals on weekly Ichimoku Cloud remain strongly bullish. However, the last three local highs have made lower highs on RSI, creating a growing bear divergence, suggesting weakening bullish momentum. Price would remain in a bull trend as long is RSI remains above 50, and enter a bear trend should a weekly candle close with RSI below 50. This is confirmed by the current trend, which began in October 2015 when RSI broke above 50. One of the few things powerful enough to create such a bearish pullback could be a hard fork in the blockchain.

Another trend indicating system is Heikin-Ashi (HA) candles, which use open and close data from the previous period, and open and close data from the current period. An open and a close above the previous period suggests strong momentum of the given trend. An open and a close within the bounds of the previous period suggests a slowing of trend. A color flip from green to red or red to green indicates the possibility of the beginning of a new trend and the end of the previous trend. Weekly HA candles have been green ever since the Bitfinex exchange hack.

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Similar to Ichimoku Cloud, the best entry occurs when the macro trend flips from a pullback and continues. HA candles flipping from red this week or next, and back to green the week after, would indicate a strong probability of trend continuation.

Other indicators, such as the Pitchfork, can confirm trend continuation as well.  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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A macro pitchfork, anchored early in 2015, captures the entire uptrend. This shows current price well outside the bounds of the trend, or in overbought territory, but also shows even with the current pullback, the overall trend is in no danger of ending.

Medium Term Technical Analysis

Similar to the weekly Ichimoku Cloud, all signals on the daily Ichimoku Cloud remain bullish. Support is drawn at the Kijun, $1076, and the top of the cloud, $980. These are considered safe bids until a clear bottom forms on the current pullback.

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The Pitchfork anchored from a previous local low gives a buying opportunity, or bid zone from $975-1105.

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The gold standard for trend indication is perhaps the moving average (MA) on the daily timeframe. Price above the 200MA indicates a bullish trend, below indicates a bearish trend. A slower MA, like the 50 period MA, is often added to create an additional support/resistance line and a potential for identifying crosses, similar to the TK lines of the Ichimoku cloud. Price remains far above the 200MA on the daily time frame ,with no indication of a 50/200MA cross any time soon. The last price touch of the 200MA occurred during the Bitfinex hack.

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Short Term Technical Analysis

The Ichimoku Cloud on the four hour timeframe shows a bearish kumo breakout, or candle close below the cloud, with a bullish TK and cloud. Due to macro conditions yielding a bullish trend, a strong long entry signal would occur if price reverses, or finds a bottom, and breaks cloud again in bullish territory. The current play on this time frame is to sit tight on the long entries for now. Although the four hour timeframe is calling for a short entry, it should be avoided as it contradicts higher timeframes, which always take precedent.

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Applying the 50MA and 200MA on the four hour timeframe show how price has tried to rebound from the 200MA a few times, but is currently closing below the 200MA.

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Price has not had consecutive closes below the 200MA since the PBoC announcements in early January. Although this will occur slowly over the next month, a cross recross of the 50/200MA would be the safest long re-entry, similar to the recross that occurred in late January. Although this does not capture the exact bottom, it avoids much of the risk of buying before the bottom is firmly established. Because of how the price action fits around OKCoin quarterly futures, there will likely be an extended period of time before a 50/200MA cross recross occurs.

Ichimoku Cloud on the lowest timeframe appropriate timeframe, one hour, shows a hidden bullish divergence, higher low in price with lower low on RSI, suggesting an interim bottom forming here as bearish momentum is weakening. This can be thought of as a higher price with increased bearish momentum, or failure to bring price lower with increased bearish momentum.

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There is also an edge to edge cloud trade, in yellow, which has already completed, again suggesting the move may be slowed or over for now.

Lastly, there is a potential for a Bullish Bat Harmonic, which is based on fractals and fibonacci retracement levels, giving a confluence of support around $980. This is a very loose harmonic because it excludes the high made on ETF decision day, but includes the low made on that day. Harmonics are often draw from an extreme high or low, which often form an M or W. The exact points can be predicted based on the pattern. This shape is considered bullish because it will typically bounce up from the last point once completed. Targets for harmonics are the 50% fibonacci retracement level of the entire move.

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Harmonics can be drawn as leading indicators, before all the points are completed, such as this formation, or drawn as they happen to confirm the direction of a move.

Conclusion

The SEC decision, which would not have altered Bitcoin protocol, was a bearish news event in an already overbought market. A protocol change to Bitcoin Unlimited with a hard fork, which would likely have unknown consequences for the Bitcoin ecosystem, is already beginning to drum up fear, uncertainty, and doubt over the mere possibility of its passage. A resolution of the block size debate, with either SegWit or Bitcoin Unlimited, should be enough impetus to push the entire market in one direction or another. Don’t expect either proposal to be adopted any time soon.

The macro trend remains extremely bullish with some indications on lower timeframes of a kind of pullback which resets entry signals. Look for and expect long entry signals on Ichimoku Cloud, Heikin-Ashi candles, or 50/200MAs as price finds an interim bottom, possibly around $980 over the next week. Volatility around quarterly OKCoin futures rollover suggests a local top with extended consolidation over the next quarter.