Technical Tuesday — Bitcoin Analysis
In the first Technical Tuesday analysis we are having a closer look on the daily, weekly and monthly BTC charts, before a brief outlook on possible mid-term Bitcoin price movements is given. The analysis is meant for readers that obtain basic knowledge about technical analysis and are interested in the mechanics of trading cryptocurrencies. The following article is based on my personal opinion and cannot be considered financial advice of any kind.
Reading the daily chart of BTC
Since its push up from the 29th of April into the price range of USD 8’500 and USD 10’000, BTC has been consolidating in what looks to be an ascending triangle (Fig. 1), typically seen as a bullish continuation pattern. As such, an ascending triangle statistically tends to resolve itself to the upside to continue the previous bullish trend.
Breaking the triangle: Since technical analysis is always based on statistical probabilities, it is noteworthy that, no matter the pattern, a breakage of either side is always possible. Thus, traders tend to wait for a breakage of either side on a relevant timeframe.
To predict possible target areas of triangles, the height of the triangle at its thickest point is measured and added/ substracted from the breakout point. (Mitchell, 2019)
At the moment, a daily close below USD 9’000 could constitute a breakout to the downside with a price target of around USD 7’800 — USD 8’000. To the upside, a breakage of the price range between USD 9’900 and USD 10’050 might trigger another wave up to the USD 11’500 range. This is a historically important level for BTC since it was unable to close a weekly candle above there since the breakdown from the All-time high (ATH) in 2017. (Fig. 2)
At this moment, BTC still has a lot of room to fill out the bigger ascending triangle (Fig. 3–2) until its conclusion in early September 2020. Price might therefore keep fluctuating in this range for a while before a breakout of the triangle occurs. The decreasing volume signature though (Fig. 2–3), typically indicating a consolidation period, is hinting at a breakout within a shorter amount of time. To confirm a breakout of this consolidation phase, it is important to see price break a relevant level (in this case either USD 9’000 to the downside or USD 9’900 to the upside) while volume on the breaking candle spikes above the descending volume trendline.
Another interpretation of BTC’s daily chart could be that a smaller ascending triangle (see dashed line, Fig. 2–1) already broke to the downside, with a retest of the broken support trend line at USD 9’700 (yellow circle). The measured target of this triangle break would still be at the USD 7’800 to USD 8’000 range. The target would be invalidated if BTC could trade above the resistance zone of the triangle at USD 9’900 or probably already if price reaches above the retest zone at USD 9’700. (Mitchell, 2019)
Retest: Markets are constantly testing established support and resistance zones (Chen, 2019). If price approaches such a zone and bounces off of it, the test counts as passed and the nature of the zone stays the same. However, if price forces itself through the zone in question, the nature of that zone changes (support becomes resistance and vice versa). In that sense, a retest can be interpreted as the market making sure that e.g. support zone switched its nature and is now treated as a resistance zone by market participants. This is known as a Support-Resistance Flip (Murphy, 2020).
Since the failed breakout attempt at USD 10’500, BTC has been in a daily downtrend with two lower highs at USD 9’900 and USD 9’700, respectively (Fig. 4). So far, BTC is also trending below the yellow 21 Exponential Moving Average (EMA) on the daily. A breakage of this level could bring a short term push up to the USD 9’550 zone, but anything below the last high of USD 9’700 can still be interpreted as a lower high and therefore part of a downtrend.
On higher timeframes though, BTC could still be considered in an uptrend as long as the previous low at USD 8’700 is not broken. An indication of this could be the possible falling wedge formation shown in Fig. 4. (Scott, 2020) This formation also typically breaks to the upside and would be confirmed with a daily close above USD 9’400. The support of this pattern at the moment is also at the USD 8’700 region, confirming its importance. A daily close below there would therefore constitute a breakdown of the pattern and continuation of the daily downtrend.
Cracking BTC’s weekly chart
Zooming out to the weekly chart (Fig. 4), BTC has officially broken the red 10 day Moving Average (MA) but so far defended the Relative Strength Index (RSI) moving average with yesterday’s weekly close above 9’050 USD on Bitstamp.
Important levels on this chart are USD 9’900 to the upside, which, besides being the resistance of the ascending triangle, is also where the descending trendline starting at the ATH is coming in, and USD 8’700 to the downside as the weekly 21 EMA as well as the last higher timeframe low are located there.
A weekly close below USD 9’100 would constitute a break of the RSI moving average at this time and add pressure to the downside while weekly Stochastics still show bearish momentum after crossing to the downside three weeks ago (Hayes, 2020). Additionally, there is apparent bearish divergence on the RSI between the weeks of 11th of May and 1st of June that is putting pressure to the downside. (Mitchell, 2019)
Analyzing Bitcoins monthly chart
Looking at the monthly chart (Fig. 5), Stochastics show that overall momentum is still to the upside. The RSI shows that a bullish trend could be expected the coming months as long as BTC can hold the EMA corresponding to USD 9’050 on a monthly closing basis. More support zones are located at the red 10 MA (currently at USD 8’500) and the yellow 21 EMA (currently at USD 7’900). Nevertheless, there is obvious bearish pressure coming from the descending trendline first put in place at the ATH, with BTC not being able to close above it in the previous month. In this chart it’s also easy to see that BTC has been in a downtrend since its ATH and has been consistently putting in lower highs over the last two and a half years. A first indication of a macro bullish trend would therefore be a break of the descending trend line, but only a break of the important USD 11’500 level should be interpreted as a trend change to a long term bullish movement.
In conclusion, short term levels are pretty clear with either a break of USD 9’900 or USD 9’000 resulting in a move of approximately USD 1000 in either direction. The long term downtrend since the ATH is still putting pressure to the downside with a possible resolution into a macro bullish trend with a break of the USD 11’500 level. To the downside, support zones are located at USD 8’700, USD 8’500 and at USD 7’800 to USD 8’000.
Sources
Mitchell, C. (2019a, June 25). Ascending Triangle Definition and Tactics. Investopedia. https://www.investopedia.com/terms/a/ascendingtriangle.asp
Chen, J. (2019, July 18). Test Definition. Investopedia. https://www.investopedia.com/terms/t/test.asp
Murphy, C. (2020, March 19). Support and Resistance Reversals. Investopedia. https://www.investopedia.com/articles/trading/06/supportresistancereversal.asp
Scott, G. (2020, May 10). Wedge Definition. Investopedia. https://www.investopedia.com/terms/w/wedge.asp
Hayes, A. (2020, May 7). Stochastic Oscillator. Investopedia. https://www.investopedia.com/terms/s/stochasticoscillator.asp
Mitchell, C. (2019, June 25). Divergence Definition and Uses. Investopedia. https://www.investopedia.com/terms/d/divergence.asp
About the author
Coming from a pharmaceutical background Dominique Hilti finished both bachelor and master at the ETH in Zurich. While he has always been an analytical person, he found his passion in financial analysis in early 2017. Since 2018 Dominique has been actively involved in trading crypto assets.
Disclaimer
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