Bitcoin Price Analysis - SEC in control

Josh Olszewicz , 19 Jan 2017 - AnalysisBitcoinPrice


Josh Olszewicz is a self-taught trader who began his bitcoin journey in late 2013. After being exposed to and learning as many technical indicators as possible, he became an expert on the Ichimoku cloud.

Repeated Yuan devaluations recently helped the price of bitcoin break all-time highs on Chinese exchanges. The People's Bank of China (PBoC) monetary policy has likely contributed in several ways, spurring capital flight and safe-haven asset seeking.

Although Bitcoin is probably the least of the PBoC’s problems, the quick meteoric rise preceded an increased interest in local exchanges. All the attention put Bitcoin on the PBoCs radar, and resulted in new regulations. This caused a ripple of Fear, Uncertainty, Doubt (FUD) amongst the wider Bitcoin trading community, and predictably, bitcoin has taken a nosedive.

We can expect continued PBoC announcements. How bearishly the price will react to these announcements is uncertain, but its’  unlikely that any PBoC announcement will be bullish.

In the meantime, a decision from the U.S. Securities and Exchange Commission (SEC) regarding the Winklevoss Bitcoin ETF (COIN) is due on the 11th March. The ETF is expected to do for bitcoin what the SPDR ETF did for the gold market. The COIN ETF is expected to provide wider access to the bitcoin market, as large managed funds are often unable to buy the underlying asset directly.

While acceptance of the ETF is widely thought of as being bullish for Bitcoin as a whole, the trend is your friend until the end, and this includes the SEC decision on accepting or delaying the ETF. The SEC has already delayed a decision on the ETF on several occasions. Any further delay should have no effect on price.

While there is no way of knowing exactly what will happen following a positive SEC decision, and the ETF itself probably won’t be live until a year or so after the decision is made, if the SEC delivers a “yes” for the COIN ETF we can expect the price to react in one of two ways:

  1. Buy The Rumor, Sell The News – Knowledge of the “yes” will leak and we’ll see a rally in price a few days or a week leading up to the announcement, with a selloff once the “yes” is official.

  2. Shaking Out Weak Hands – A selloff leading up to an announcement to essentially fill the institutional bids at much lower prices.

On a technical note, Segregated Witness (SegWit), Lightning Network (LN), and Rootstock are driving positive fundamentals. Segwit removes the ‘signature’ from bitcoin transactions, thus decreasing their file size, and increasing the number of transactions that fit in a block. Lightning Networks provide instant, off-chain, bidirectional payment channels, and require settlment once they are closed. LN’s can potentially move large numbers of transactions completely off the blockchain. Rootstock is a Smart contract solution, and implements side chains, which may provide added functionality to bitcoin, and provide alternative blockchain for transactions, connected directly to bitcoin.

Of all the protocol changes addressing blocksize and scalability, Segwit is the closest to becoming a reality, with currently >25% of miner network support. Segwit has one year from September 15th 2016 to be adopted by miners and become activate.

Considering most miners are located in China, there may not be enough incentive for them to change anything in the near future. If it ain’t broke, don’t fix it. Although the network may be clogged and expensive to some (Roger Ver et al), a clogged network with higher fees likely benefit miners more than Segwit adoption.

 

Technical Overview

There are many indicators and drawing tools that can help both determine if a trend exists, the health of that trend, and overbought and oversold conditions within a given trend. This technical analysis uses Wyckoff Structure, Ichimoku Cloud, 50/200EMA, and Pitchfork.

Phases of price structure are predictable and measurable through several metrics, most notably Wyckoff Structure. The idea that Bitcoin has closely followed Wyckoff Structure is shared by many traders. All charts use BNC’s Bitcoin Liquid Index for maximum accuracy.

Despite news driven events, such as Bitcoin developer Mike Hearn selling all his Bitcoin and publicly denouncing the community, Bitfinex being hacked and most of user funds being stolen , and the recent PBoC regulation announcements, bitcoin has stayed within the bounds of Wyckoff Structure, as well as Horizontal Support/Resistance and Chart Patterns, amongst other technicals.

 

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Based on Wyckoff Structure alone, we can see that price has entered ‘Phase E’ meaning that price will continue to develop higher and higher trading ranges coupled with zones of accumulation.

A simple way to determine if price is overbought or oversold in a trend is whether or not there is deviation from the mean of the trend. One way this can be done is by adding a Pitchfork, as shown, with an anchor at the LPS from Phase D and the high/low from SOS/LPS in Phase E. The mean of the trend being the Median Line (ML) of the Pitchfork.

The ML acts as a high probability magnet for price, which is where it will either; accumulate, zoom through, or bounce down from as resistance. This may sound both unhelpful and convoluted, but essentially the ML can be thought of as a Potential Reversal Zone (PRZ), similar to that of Fibonacci Retracement levels.

Each diagonal of the Pitchfork can be thought of as a PRZ or support/resistance line. The upper blue diagonal zone being ‘most overbought’ or the top bounds of the trend and lower blue diagonal zone being ‘most oversold’ or the bottom bounds of the trend.

Once Phase E has been firmly established, the Pitchfork can determine trend health almost completely. You can see that price has drifted up through the lower blue quartile for most of Phase E, until an accelerated rally likely driven by Chinese Yuan devaluation and capital flight.

We can measure the beginning of Phase E, or any accumulation phase, with various chart patterns. A continuation pattern, such as a Flags and Pennants, Cup And Handle, and Ascending Triangle are amongst the most common. Any chart pattern has various determining factors including but not limited to volume, support and resistance tests, and a measurable target.

 

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This gives us a pre-breakout target of ~$1000. This is also a reasonable target that is well within the bounds of Bitcoin’s All Time Highs (ATH). Based on the Market Memory principle, you’d expect with some degree of certainty that there would be heavy resistance and volatility at, near, or around ATH. Before Jan 2nd, a weekly candle had never closed above $961.

Round numbers (50, 100, 500, 7000, etc.), ATHs, or numbers of cultural significance (4 and 8 in China, 666), tend to have psychological support/resistance and baggage attached to them. After all, markets are traded by people with number bias or by algorithms programmed by people. Another resistance target was Gold parity - as was the case in 2013.

 

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While this may appear purely retrospective, this pattern was seen well in advance by many traders. A large number of traders also use the 200 day (slow) moving average (MA/EMA/SMA/TEMA) to determine if price is in a bullish or bearish trend. We can add a 50 day (fast) moving average as well and look for confirmation in the shift of a trend with moving average crosses.

 

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These 50/200 crosses are so widely used and respected, they even have special names. A 50 over 200 cross is considered extremely bullish and known as the Golden Cross. You can see a Golden Cross occurring on October 30th 2015, which confirmed a shift in the accumulation or bear phase to a bullish markup phase. Prior to that, on October 25th 2014, the bear trend was confirmed with the opposite of a Golden Cross, a Death Cross. There is no risk for a Death Cross in the immediate future, which would signify an end to the current bull trend.  

The most important question to ask is how do we know when Phase E of bullish markup is complete, and price has entered distribution phase? Using Pitchfork, EMAs, and Ichimoku Cloud, we should be able to identify the end of Phase E/beginning of Bearish Distribution well before it occurs.

The beginning of the Bearish Distribution phase can be seen as just the opposite of the bullish accumulation phase. Rally, Automatic Selloff, Support Test, and so on. While bitcoin is nearing the end of Phase E, there are four distinct signals for determining it’s conclusion.

1.    Candle close below the 200 EMA with an eventual 50/200 EMA Death Cross, a simple way to signify a shift in trend and momentum

2.    Bitcoin closes in or below the cloud for several consecutive days. While the price is in the cloud, trend is neutral, expect sustained levels above the cloud until price closes below the cloud for several days, and not due to a FUD event alone. A similar event occured during the Bitfinex hack, price closed below the cloud but recovered, hugging cloud resistance, and broke above the cloud one month later.

3.    Bitcoin closes below the lowest quarterly support of the pitchfork for several days. Once the price closes below the pitchfork for at least two days, the entire Pitchfork would be invalid. The longer you want to make the invalidation decision, the more accurate that decision will be. Price has yet to even come close to closing below the Pitchfork support in Phase E.

4.  Failure to make a higher high after repeated resistance tests. Just as repeated tests of support occurs while price is sideways, during accumulation, expect several tests and failures of resistance before you can definitively determine that Phase E has ended.

 

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If we move to a weekly view of the trend, there is a potential Bearish Three Drivers Pattern playing out (named for the ultimate target of the entire move). Three Drives patterns are thought of as leading indicators because once the three drives are establish, a retracement target can be easily identified.

 

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This is a product of Elliott Wave theory. Essentially, bitcoin makes three measured moves confirmed by Fibonacci Retracement levels, and the final target can be predicted by measuring Fibonacci Retracement levels of the entire move.  Because this is a weekly chart, expect this eventual target to be reached at the speed of molasses in January. If a new high is established above the Jan 3rd rally high, this pattern is invalidated.

Ichimoku Cloud also indicates a buy zone, $475-$546, with a “Flat Kumo”, which is a 50% Fibonacci Retracement level of the previous move and magnet for price the longer it gets, at $475. Although this target may seem unrealistic at the moment, target and support confluence has been forming for several weeks.  

 

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Short Term Outlook

The lowest timeframe appropriate for Ichimoku Cloud analysis is typically the 1h chart. The cloud uses dynamic resistance/support levels with moving averages. This allows traders to capture 80% of a trend, without falling for fake out breakouts or being stopped out unnecessarily.

Bitcoin is currently above the cloud. As with the 200 day moving average principle, this provides a signal that the current trend is bullish. The next signals are two moving average crosses, one with the Cloud/Kumo and the other with the Tenkan and Kijun lines. Both are currently bullish. Lastly, the Lagging Span (LS) sits behind the price, and indicates whether or not price action was above or below past price action. LS is above the current price and cloud which also suggests bullish momentum. Immediate bullish targets can be found by using horizontal resistance.

 

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Medium Term Outlook

Let’s look at Ichimoku Cloud and the 50/200EMAs. The cloud is showing a potential Edge to Edge trade coupled with a Flat kumo, which typically proves to be a highly profitable combination. Barring any more FUD events, price will likely return to at least $967 within the next week.

 

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EMAs are showing a potential bullish cross to confirm a shift in the micro trend and an end to the current pullback phase.

 

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Conclusion

When news events correlate with technicals, expect large price movements. Watch the market until after the SEC decision. Random news events will have then largely abated and price will continue with Phase E or will start the bearish distribution phase. Overall, the market feels exhausted, with battered bulls and battered bears alike.

Disclaimer: The information presented in this article is general information only. Information provided on, and available from, this website does not constitute any investment recommendation.