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Bitcoin Market Analysis: The Blow Off Top

Bitcoin Market Analysis: The Blow Off Top

I have heard many throughout the crypto world make some erroneous claims about the current state of Bitcoin. The most common would have to be misusing the term bear market. Many claim that Bitcoin has been in a bear market since the fall from all time highs. This is a more than questionable claim if not completely incorrect. Why? Let’s take a look at the characteristics of a bear market and how they differ from a market correction, look at blow off tops and why this would be the better way to describe the current bitcoin market, compare the current market to the 2013–2015 bear market, go over a few possible scenarios we could face over the coming months.

Characteristics of Bear Markets:

  1. Bear markets have consistent lower highs and lower lows (a downtrend) with occasional periods of consolidation that result in a continuation of said downtrend. This is called redistribution which we will get to later.
  2. Bear markets break the uptrend line that carried the price from birth or the end of the last bear market to all time highs on both standard and logarithmic charts. This uptrend line should be drawn from the reversal point of the last downtrend through a minimum of three correction lows — not just as many lows as you can fit the line to. Drawing this correctly can be a bit tricky especially with something as volatile as bitcoin. I will describe this in detail later.
  3. Bear markets experience a massive surge of volume (volume expansion) in the direction of the downtrend.
  4. In traditional markets, bear markets on average last 365–540 days (12–18 months).
  5. Bear markets are painful. These are recession and/or depression level events. Investors across the board lose all confidence in the asset. These are not to be confused with large market corrections or blow off tops, though either can turn into a bear market if they fail to reverse.

Characteristics of Market Corrections:

  1. Always follow large, rapid run ups in price not supported by the underlying valuation of the asset. Corrections are market punishment for over-speculation, over-valuation, etc.
  2. Often fall into a range with signs of accumulation at the base of the range, also known as a reaccumulation phase before an uptrend continuation. Volume contracts on each down move inside of said range, and expands on each up move. This can be seen on smaller time frames. On larger time frames, volume will be lower than historic levels (consolidation).
  3. Corrections bounce above or off of an existing uptrend line. This bounce often occurs from the only lower low of the range if one is present. You will usually see a series of either higher or slightly flat lows with lower highs.
Depending on where/how you want to measure, the 2013–2015 bear market lasted between 1 and 2 years.

Percentage Changes

In traditional markets, a commonly accepted rule is that a drop of -10% is considered a correction, and a drop of -20% or more is considered a bear market. I think it is fair to say that if normal market corrections are -10% or more and normal daily movements are +/- 1 to 5%, then if Bitcoin daily movements are +/- 5 to 15% on average, a -40% movement can still be a correction due to Bitcoin’s volatility and small market size. In fact, I took an average of the percentage drop of all market corrections on the Bitstamp chart and came up with 42%, with the largest being the correction before the run up to the 2013–2015 bear market. It was a correction of -75%, but I feel this correction is a statistical outlier that was the result of a blow off top. In fact, the fall was deeper (83%) if you measure from the wicks of the initial flash crash, but I’ve chosen to leave this out of the measurement due to the immediate buy up that followed. As for bear markets, using historical data, it appears that a drop below 70% indicates a potential bear market.

Here the low prior to the full bear market reversal is labeled as the reversal point because this is where accumulation began. More on this later.

What Is A Blow Off Top?

I think the best way to describe a blow off top in crypto language would be to call it a FOMO top, and honestly I think this better explains what is actually happening. FOMO, or the fear of missing out, has been responsible for quite a lot of growth in the crypto world. However, FOMO often throws the market out of balance. Most of the time this isn’t an issue as long as the market is allowed to correct. Corrections are an important requirement for healthy uptrend growth. When a market experiences an enormous amount of FOMO resulting in rapid growth without any corrections, this high level of demand forces the asset into a dangerously high level of overvaluation. During healthy growth, market corrections test previous resistance as support forming floors for the price to retrace to. In their absence, price breaks resistance levels and/or all time highs with ease but forms no support on the way up.

You can think of this like building a ramp 100 feet into the air. Imagine for the first 30 feet you place vertical and horizontal supports to hold the ramp up as it gets higher and higher, but imagine that for last 70 feet you stop placing those beams. Now Imagine driving a car up that ramp really fast. The first 30 feet would be fine due to the underlying support. The next 30–40 feet would be as well due to the momentum of the car. As the car approaches the last 30 feet of the ramp, it will begin to show weakness due to the lack of underlying support and the car losing momentum. When the car reaches 100 feet, the ramp breaks and falls to the last support beam. The same thing happens with market price action. This is a blow off top. (See chart below)

Bitcoin experienced this kind of price movement from the $5500 correction to all time highs at $20,000. Price rose $14,000 in a little over 30 days. We were due for a deeper correction at $5500. In the chart below, you can see where price breaks from the uptrend and momentum continues to carry it upwards along with some small retracements. However, after $5500, there were no more corrections. Price shot straight up. This is a textbook blow off top.

Rapid growth like this brings in more and more demand as new and often inexperienced investors jump in at higher and higher prices. No one wants to sell the rally (#moonshot, #lambo) as long as the momentum is strong, so the price continues to rise until it finds sellers. Experienced investors, especially with large institutional sized accounts, are more than willing to sell to these new buyers during the last stretch of the ramp because they know this growth is unsustainable. In fact, institutional level investors are highly dependent on retail FOMO to be able to take profit at or near all time highs. This is where you begin to see volume diverge from price especially if you have tools to compare the amount of selling volume to the amount of buying volume.

Taint I(TI) and Taint’s Demand Index(TDI) are tools I made. TDI is the standard Demand Index that I’ve altered. TI is a cumulative volume indicator.

Taking all of these factors into consideration, it becomes quite obvious that Bitcoin experienced a blow off top in December, and is now deeply mired in a much needed correction, but this is not a bear market until the supports fail. The price immediately corrected to $5900 which is near the closing support level of the last correction. Price has yet to make a lower low since.

Using the ramp analogy, if the price were to break lower than support without immediately reversing, this would be the same as the weight of the car falling through the structural supports of the ramp. However, as the car hits each support level on the way down, the momentum of the car’s descent slows, and it will eventually find a level that can support its weight. Price action behaves the same way. Price falls through support with high momentum/volume which is confirmed by a volume expansion in the direction of the price’s fall. Price breaks support just as easily as it broke through resistance levels leading into the blow off top — this would be a bear market. Slowly the fall begins losing downward momentum, and when it finds and holds a support level, it will consolidate into a range and slowly build momentum like a spring being compressed as large investors begin taking their positions. Typically, panic selling among retail investors fills the waiting limit orders of large investors near the bottom of a correction, but in a bear market, most large investors wait to see a clear bottom before taking positions. This prolongs both the market decline and the length of the consolidation period before a reversal.

Though it is not something you hear often, bitcoin can actually retrace all the way back to $3000 and still remain in an uptrend. Being able to see this target is dependent on the accuracy of the uptrend line.

How Close Are We To Being In A Bear Market?

Extremely. In fact, quite a lot is riding on the next few months of price action. Review the charts below. Some of the labeling may or may not make sense to you. In the next section, I will review some Wyckoff characteristics. For now, simply look at the price action and volume analysis, especially the percentage changes and the time it took for each phase.

A retracement to the support of the last correction could form a spring reversing the trend upwards. Also, a retest at or above the base of the range ($5900–$6400) could fail. This is known as a last point of supply. We could then see a failure of the uptrend log and strong downtrend continuation. Cold storage holders will likely begin dumping. Large investors won’t touch it. This would be a painful scenario for Bitcoin.

My Method Of Analysis

The aim of the Wyckoff approach to technical analysis is more or less to determine what large investors are doing and attempt to trade with them rather than being cannon fodder for their stop hunts, sell offs, and buy ups after panic-induced selloffs. I won’t go into enormous detail about Wyckoff, but it is a powerful tool when used correctly. It is NOT a pattern system. It takes a long time to master, and I learn more and more every single day. Quite a lot of the content of this article thus far is based on Wyckoff concepts. The vast majority of technical analysis is based on Wyckoff’s research, but each has been an attempt to make this form of analysis easier to understand and use. Wyckoff centers around the concept of supply and demand, and traders like myself use this form of analysis to try and determine if the majority of institutional level investors are accumulating or distributing their positions. Larger investors are almost always buying or selling in bulk, so to ensure their holdings are purchased at the best possible price and sold at the best possible price, price action is held in a range. Why? Because attempting to immediately sell massive positions will result in lower and lower sell prices as each bid price is filled, and market buying would result in buying at higher and higher prices as each ask price is filled — especially if these positions were bought or sold at market. These large investors hold price in a range and rely on stop hunts and painting false bullish and bearish signals via automated trading to trick retail investors into either buying or selling to them at lower or higher prices. Most of the crypto community refers to some of these resulting patterns as barts, which is basically a flat or slightly slanted period of movement followed by a sudden drop down or sudden spike upwards that can repeat numerous times in a range. These ranges can be traded, and honestly, they provide some of the best trading opportunities if you know what you’re doing. If you don’t, you have likely been chopped near to death over the last couple of months.

To aid my Wyckoff analysis, I use Fibonacci retracements, volume weighted average price (VWAP), Weis Wave, and a couple of indicators of my own design. Why? Because institutional algorithms are often programmed to trade based on the first two. For example, buying below the VWAP or a moving average of the VWAP means getting the cheapest price of the day or over X periods. Traders working for large institutions often receive bonuses for making a high percentage of their purchases below the VWAP. Weis Wave was designed specifically for Wyckoff trading — its a cumulative volume indicator more or less.

In short, I want to be trading with the big boys and not against them.

To aid readers in obtaining a better understanding of my chart labeling, you can visit:

http://www.ltg-trading.com/glossary-of-wyckoff-terms/

http://stockcharts.com/school/doku.php?id=chart_school:market_analysis:the_wyckoff_method

Let’s Take A Look At The Current Range

I have noticed some evidence of accumulation between $7000-$9200, but for this to truly play out in a bullish way, we need a change of character for this range. This would require at least breaking above the downtrend line of the range. Preferably, I would like to see a new or equal high rather than a lower high, but getting above the downtrend would keep me bullish for this range. Judging by the signs of weak supply above the PS, a spike above $10,000 off of a bounce here isn’t impossible by any means. Though I am more of a “here are some highly probable scenarios” kind of analyst and not one who often predicts claiming high levels of certainty, I do feel like a correction either here that makes a new low or another bounce that breaks the downtrend and makes a new low, preferably to about $5500, a level I’ve mentioned multiple times in this article, would be quite bullish. Sometime around the month of September, I expect Bitcoin to either reverse into an uptrend continuation or fall into a downtrend confirming a bear market,, and I will explain why I’ve chosen this date further down. At the present time, I do not have enough data to say for certain which direction will we go. The chart above lays out a potential bullish scenario. The cart below lays out a potential bearish scenario, but the latter at this time appears to be less likely. However, as I said above, if this were to fall to a new low and fail to reverse, many of the accumulated positions in this range will likely be sold off as would many hodler positions being held in cold storage. This scenario would be quite bloody.

I find a failure to break the downtrend of the range to be the most likely bearish scenario, but we could fail at any of these areas.
You can see that Weis Wave sell volume continued to increase rather than decrease over the last week or two, and didn’t allow for a bullish reversal. Though this chart is a few days old, this continues to be the case.
This black line is the slow line of my indicator. It is the 100 day moving average of the colored line. This could be viewed as a double top with the volume spike coming on the first jump up near 9.8k
Using my indicator and drawing the SCLX line of the range from the candle base rather than from the wick, the bounce to 10k would be a failed rally since it follows a SOW. You can also see it makes a higher high on my indicator.

Lastly, for the bearish scenario we will compare similarities between the last bear market and where we are now. There’s a strong correlation. The daily 100 EMA has crossed below the 200 EMA giving us a full death cross for this range. The exact same thing happened just before the last bear market fell into its downtrend.

Also, the Weekly 50–100–200 SMA and EMA also show some scary correlations. You can see in the chart below that the current 100 weekly EMA is sitting right at our important support level of $5500. During the last bear market, this level did not hold. We have also broken the 50 SMA and 50 EMA in the same way.

You can see here that in the same way we did during the bear market, we found support at the 50 weekly SMA, had a failed rally with a false breakout, fell down, and broke the 50 SMA.

Why September?

I want to wrap this up with an explanation of why I chose the month of September as a potential reversal point. First, if we assume that if this becomes a bear market then will see a total of an 80%+ drop in value from all time highs and draw that drop into our chart, this gives us a target of between $2900 and $3200. Next, we take the uptrend line into consideration as a potential reversal target, as well as the 200 weekly EMA and Fibonacci levels. Last, we use the downtrend line from all time highs as support on the way down.

Chart from above

This target would be exactly 1 year since the last time Bitcoin closed below daily 50 EMA or found support/resistance at this level. We can look back at historical price action to see if any other reversals have happened around this time, and yes they have. From this we can plot a couple of bullish and bearish scenarios:

Ignore the projection times and dates for the curved arrows. These simply show the percentage moves and the targets. From this you can see that for a bullish scenario, I expect either a spring from 5.5k or a period of consolidation that eventually bounces off the uptrend. If we enter into a bear market, I expect that we will either reverse in September or find support for consolidation. However, if this level were to fail, we could be in for quite a big drop even further down. This I don’t expect, but it is possible.

One last potential bullish target would be a spring off of $5000 in November using the alternative uptrend line as a target for the bounce. I do like the way this target fits, but I’m certain of this line’s accuracy due to the lack of data on the Bitstamp chart prior to 2011.

Notice that we still maintain a drop below 80% which is consistent with previous blow off tops.

Putting It All Together

For the local range, we are looking at either a full bullish reversal after falling from here to $5500, or a bounce here that continues upwards towards the downtrend line of the range. What happens after will make or break this range. If we fail to break above the downtrend line, a bear market is highly probable. If we break it and make a higher high, our chances of holding this range for a bullish reversal are quite high. We could fall back down to make a new low ($5000-$5500), spring, and reverse, or consolidate in the middle of the range for some stepping-stone accumulation until we have a break out and test $11,700 or so. It is important to note that $11,700 is the strongest support/resistance between all time highs and the local lowest low. Breaking it will not be enough. We will have to break it with a lot of momentum and retrace back to find support and consolidate. This will give us the best chance of hitting all time highs again. If we do end up falling into a downtrend, I expect a reversal attempt between $2900-$3600. If this attempt fails, we could very well continue down. Even if we fell below $2900 today, the fall would break the uptrend log line, and this would likely cause long term investor panic. My target date for a bullish reversal despite the outcome of this range is September of 2018.

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