Let’s get technical…
Today’s story is going to be a bit of insight on our thought process when analyzing the chart. This will hopefully fuel some interest out there and some might challenge our analysis. Constructive criticism is the only way to improve!
We’ll take a look at the BTC/USD chart, since it’s the one with most attention, and we’ll construct the analysis by stages. No fundamentals will be taken in account. Whilst this is always a factor when entering or exiting a trade, for the purpose of illustration here we will stick to charting and only using moving averages as an indicator. The simpler the chart the easier to translate.
Of course I must say this is not to be taken as investment advice and if you require such advice, you can always contact us at contact@blockchainnordic.dk.
To start, let’s take a look at the daily chart, we use log charts for candle size precision. We use the Bitfinex chart as Bitfinex tends to be the market leader in volume. Two very important attributes we stick to in Blockchain Nordic are Money Management, always limit your risk exposure in a single trade, and secondly ‘Stick to the plan’. In highly volatile markets, it’s very easy to get emotionally driven and let a loser run or lock a winner too soon. If you entered a trade, you had a reason for it, STICK TO THE PLAN!
First lets take a quick look at the weekly chart for an over all overview of whats going on at a macro level. We quickly realize we aren’t in a bear move, as we have experienced over these last weeks, but a correction of a strong bullish momentum, as expected with an asset that presents limited supply. The U formation comes just after the price hit the 50 period moving average, seen as a strong support. We can also notice that the previous bull run was right after a U formation. Whilst the previous ‘dead cat’ bounce was after a U formation (February 2018), we don’t rely simply on one indicator to determine the direction of an asset, however, it’s good to have an overall picture
On the daily chart, we get to see the not so friendly death cross, where the 50 period moving average and the 200 period moving average cross, which is a confirmation signal of a bear trend, however, in the weekly chart, we still see a strong bullish moving average. Which can be seen as a stronger indicator in overall trend. The daily chart has completed an inverted Head and Shoulders when it broke the neckline at $9057, which will be our first support of this pullback, but we’ll come back to this later.
Let’s add some Elliott Waves and see what it looks like in the daily chart. We can distinguish two main waves, an impulse wave 1–5 and a corrective ABC pattern. To draw predictive waves, we will rely on key support and resistance areas as well as Fibonacci retracement, in particular, the 38% retracement, which seems to be Bitcoins favorite. Let’s bare in mind that the S/R levels are indicative areas and not a precise price.
The resistance at $9700 is the 61% fib retracement of the most recent bearish move from $11700 to $6400, also the top of the second impulse wave in said move. So it is a strong resistance and one to consider for a pull back of the recent bull move from $6400. Whilst this Elliott Wave is truncated and doesn’t fit the theory to the fullest (we might see the 4th wave end where the second one started), it is not unusual to have not-so-perfect market moves, thus it is important to be reactive when trading rather than predictive! Let’s move on to a shorter time frame to adjust our waves!
In the 4 hour chart, we can determine the 38% fib of the second leg is the $9011 area, this will be our first support level to watch for, however, a more precise point for the fourth wave to end would be between the 38% fib of the move from $6400 to our most recent high $9700, at $8440 and the previous resistance turned support between $8700 and $8500. It’s always important to clean a chart to not get too confused with everything on it once we know the key levels to watch, so let’s go back to basics.
The chart above is an actual illustration we discussed this morning in the office. While writing this story, the price has been fluctuating but playing the move above. We see two clear resistances that can be potential support zones, as mentioned previously. We expect an ABC corrective move to end in the areas previously mentioned ($8500 to $8700).
It’s nice to see all these pictures and colorful lines, but what does execution look like and how do you take decision in terms of direction? Rarely does a trader enter the market predictably, as it can be costly, especially in Bitcoin! In our case, we are reactive traders, to be reactive, we follow price action in these key areas. We know from previous moves that Bitcoin tests a key area various times, how to know if it will not break? You don’t. The $9040 resistance has been tested and retested for 3 days, with no decisive move either way. So whats the difference now? The only way to sit comfortably is to elaborate a plan with a quick exit strategy, accounting for the implied market volatility. Let’s take a shorter time frame and have a look at it.
We have two very similar scenarios here, the first rejection at $9040 and the most recent one at $9729. Let’s check what the Fibonacci retracements look like.
In the first move, we see the price reached the 38% Fibonacci and never broke under it, as we already mentioned, the 38% retracement seems to be the most accurate one for Bitcoins pull backs, however, on the most recent move, we see the price reach the 38% level, retrace back to 23% and then pierce through. This is a signal that indicates a stronger pullback, and a good trade trigger.
Now, whats going on in the market? Should I short? Should I long? If you are holding Bitcoins, it’s always a good idea to hedge by shorting key areas with a tight stop loss on the upper direction and quickly move it to break even when the price is below the 23% retracement.
We prefer to wait for key areas to enter our long positions. The break above the descending trend line was a strong indicator towards a new bullish move, the levels to watch currently are $9000-$9100 and $8400-$8600. A break below and back in to the bearish trend line would expose the major currency back in to a bearish scenario. A bullish trend can’t be confirmed before a break above the key resistance at $11700.
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