The following comments, provided for information only, can under no circumstances be construed as recommendation or incentive to buy or sell any investment or engage in any trading strategy individually or collectively.
What if, it was possible to trade Bitcoins like other assets, in spite of sheer volatility? Not that there are much fundamentals to crunch, or that I changed my view from “The Missing Bit in Bitcoin”, a 2014 blog pointing out the lack of investment value
of the cryptocurrency. Yet, from a pure day-to-day or weekly perspective, technical analysts can start having fun. After all, we have a fairly deep, usually liquid, seemingly transparent, unrestricted 2-way, 24/7 market, and prices obviously sensitive to news,
rumours and emotions -a trait of market efficiency.
No room here for Bollinger bands and analyses based on volatility or moving averages, as high volatility would make them inevitably deceitful. No trend lines either as charts can go on logarithmic scale at any time. In the absence of market controls and
given the extreme volatility, the market dynamics are best reflected in the price/volume relationship, as indication of upward and downward pressure. Moreover, the recent price swings have added downside price history to the previous up-only records, allowing
for wave analysis to begin.
Cyclical waves theories have it, that when markets peak after a long and extended bull run, the amplitude of the downfall is proportional to that of the uptrend. Prices then retrace within 2 downtrends, each made of 3 distinct falls in heavy volumes. In
between falls, prices may recover some of the lost ground, yet in lower volumes. The sequence is 3 moves down, 2 up, 3 down. The downtrend may eventually end when enough longs have cut their losses or their profits. Following a sell-off, a period of low volatility
in very low volumes indicates that the order books have slimmered to the point where the next high volume (bid or ask) can easily drive the price.
A durable reversal needs a complex pattern. It often consists of testing the lowest levels again, or exceeding them, but in smaller volumes. The reversal is complete when high volumes drive prices higher, for at least 3 consecutive sessions, steadily, without
re-igniting the selling pressure.
Technical analysts usually expect markets to reverse after a correction of either 38%, 50% or 62% of the amplitude of the last bullrun. Assuming it started in April 2014 around US$450 and peaked last December above US$19,000, the market could retrace down
around US$9,700 before attempting a reversal -which it did-, or else fall further to 7,500. If it fails to reverse around those levels, trend extensions point toward 6,300. Erratic price swings may appear within reversal patterns, making the market overall
very treacherous to trade as long as no clear directional trend re-appear. Here, volume data and patience are key to properly reading the market dynamics.
The picture attached is a Bloomberg.com chart of a Bitcoin tracker fund which clearly displays a 3-2 sequence since the peak. For volume data, Web sites of the main trading platforms provide 30 day charts of price and volume history. Although none of them
can represent the entire market, the main ones should reflect the buy/sell pressure.