Bitcoin Price Analysis - SegWit looming

Bitcoin has been ranging over the past week, down $158 or about 5.8%. Hash rate has also decreased slightly, now at 4.8 trillion GH/s. The most pressing matter continues to be the scalability and block size debate.

With 86% of mining pools now supporting SegWit2x and 15% of Core nodes already signaling support, SegWit is no longer a matter of if but a matter of when.

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SegWit2x is currently being coded by Jeff Garzik, who has yet to release code for testing despite the deadline quickly approaching. The UASF (BIP148) will activate on August 1st regardless, with signaling continuing to rise.

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Global Over The Counter (OTC) volume on LocalBitcoins has cooled off over the past few weeks but remains near highs.

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USD trading volume continues to lead the market over the past 24 hours, with continued large premium in South Korean Won markets.

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And here’s how trading volume has been spread over the past two weeks across the major currency pairs, largely dominated by USD volume during waking hours.

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Technical Analysis

After a failed inverted head and shoulders chart pattern, it’s always important to reassess the trend and it’s relative health. The Ichimoku Cloud, Pitchfork, as well as Divergences are all appropriate indicators for this process.

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. All signals on this timeframe are bullish, and should therefore not be used as a measure of current entry signals.

The daily cloud remains decidedly bullish with no actionable signals other than potential Kijun Bounces. An edge-to-edge short trade (red arrow) would be triggered by a daily candle close in the cloud. The target would be the opposite edge of the cloud, a potential $400+ trade. There has not been a daily candle closed within the cloud since late March. The candle found support on the opposite edge of the cloud and was the start of the current bull rally.

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There is also another cloud principle, the long flat kumo (green arrow) at ~$1940, which occurs when price has remained in the same range without making higher highs or lower lows. These are considered high probability support and resistance zones as they represent 50% of the previous up or down move. Had price not already pulled back 3 times with successive bounces, there is a high degree of certainty that those zone would be reached. So in the future, just remember, ‘flat kumo = magnet’.

This has already happened a few times (green arrows) in the multi-year bull trend on the daily cloud.

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On the four hour cloud, there is a classic thinning and flattening of cloud as price ranges and snakes in and out of cloud. When this occurs, Bollinger Bands often provide a better sense of when to enter a trade based on momentum.

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However, the same entry signals can be abided using the Ichimoku Cloud. Once the price is above Cloud, the Cloud is bullish, the TK cross is bullish, and the LS is above price and above cloud, a long entry signal is triggered. You can see that despite these conditions being triggered on June 20th, there was no payoff. These trade entries should be considered high probability but not 100%, appropriate stop losses should always be used. This fakeout breakout is also a reminder to use Bollinger Bands on a higher timeframe when price is ranging.

Further adding to the confluence of the previous failed long was an inverted head and shoulders chart pattern which appeared complete, but never materialized. Stop losses for head and shoulders trades should always be above or below the right shoulder before the throwback, and at the neckline after the throwback occurs.

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There was no squeeze or breakout on June 20th on the daily Bollinger Bands to indicate a long entry.

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A valid Pitchfork can be applied to the first of the recent set swing high and low moves with an anchor on the August 20th 2016 Bitfinex-hack low (not shown).

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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. The multiple price touches of the diagonals thus far suggests the Pitchfork has high validity, therefore, traders can project the trajectory of future price with a reasonable degree of certainty.

The Pitchfork can be deemed valid due to the multiple price touches of the support and resistance diagonals (red and green arrows above). Despite being valid, traders wouldn’t look to the Pitchfork for any actionable signals at the moment, but would use it as a roadmap for future moves. A candle close below the pitchfork would invalidate the pitchfork and therefore the roadmap would be cancelled.

Lastly, bullish and bearish divergences have been extremely actionable signals on higher timeframes recently. Divergences should only be measure from price extremes and not from ranging price action.

Bearish divergences occur when price makes higher highs and momentum oscillators do not. This suggests waning bullish momentum and mean reversion with possible trend reversal. Bullish Divergences occur when price makes lower lows and momentum oscillators do not. This suggests waning bearish momentum and mean reversion with possible trend reversal.

Hidden bearish divergences occur when price makes lower highs and momentum oscillators make higher highs. This suggests that despite increased bullish momentum, there is no follow through with price and therefore mean reversion with trend reversal is possible.

Hidden bullish divergences occur when price makes a higher low and momentum oscillators make a lower low. This suggests that despite increased bearish momentum, there is no follow through with price and therefore mean reversion with trend reversal is possible. Here is my favorite divergence quick reference guide.

There have been a series of bullish (green) and bearish (red) divergences over the past two months on the daily timeframe.

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When bearish divergences occur on the daily timeframe, traders expect a pullback to the 20 period moving average, which is also essentially the Kijun of the Ichimoku Cloud much of the time, and can therefore also be thought of as a Kijun Bounce (green thumbs).  

Many traders see bearish divergences as short entry conditions. However, because divergences are essentially a lagging indicator, there is a high likelihood that as the short is open, price moves higher (red tumb). A higher probability short entry would occur after the bearish divergence when price falls below the 20 period moving average like it did on June 14th.

Other examples of this have occurred previously on the daily timeframe in February and March.

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In late February, there was a bearish divergence that rolled over onto the 20EMA. The long-wicked candle a few days later was the SEC COIN ETF decision. This was followed by a break of the 20EMA, a short entry signal, leading to a bullish divergence and mean reversion. Once the 20EMA was broken, the bull trend resumed and did not return to the 20EMA until the next bearish divergence on the daily timeframe.

There are no current active divergences, but arguably, the last three series of lows represent a growing hidden bullish divergence. With RSI reset, now hovering around 50, this gives price much more upside from the current price level and beyond.

Conclusion

SegWit will occur by August 1st at the latest. How we get there may be direct or circuitous and drag price up or down with it. Plan accordingly. This will likely be the single largest network event Bitcoin has experienced to date. Technicals are essentially flat with trend remaining intact. Look to the Pitchfork for support and resistance targets and the daily and four hour Cloud for long or short entry signals. There is a building two month long hidden bullish divergence which should indicate a heavy bullish bias.