A Technical View of Bitcoin

Let’s take a brief look at the technical position of Bitcoin as of 2014-01-24 over a Daily time frame. This will be a professional-level analysis.

Elliott Waves are notoriously unreliable, and the Graveyard of Trading Failure is littered with the corpses of those who refused to leave any chart unlabeled. Waves are actually a great tool in our arsenal as traders, but like a hammer, if it’s the only tool you have, everything begins to look like a nail.

The key to using Elliott Waves is never looking for waves. When they jump out at you, that’s when they’re important. I picked the bottom in Bitcoin in December because of the very clear ABCDE complex correction that unfolded then:

Due to the scale of that correction, we had to conclude that the next wave up would be larger than previous rallies, which means we would expect a rally to at least $840 — and we got that; the rally went to $990 on Jan 6.

Following that rally, the picture becomes less clear. We don’t want to take an opinion as to whether the rally to $990 was a Wave 1 or Wave A, so I’ve labeled it as Wave 1 or A, which implies we’re in a Wave 2 or B down currently. Corrections typically complete between 38% and 100% (centering around 62%) of the impulse time, so this correction is getting old. It’s “felt” long, and indeed it should be over within the next 3 days, as the 100% time target falls on January 27.

A Wash-and-Rinse pattern would be ideal here, which means a quick spike lower to take out stop losses below the previous low at $783 (which incidentally landed on the 62% time retracement at Jan 18) or even (ideally) the low at $720 on Jan 14, followed by a quick recovery to back above the breakdown level. That would be a good indication that the correction is complete (having “washed out” all of the weak Longs above that level) and we should be looking for a wave C or 3 up to at least $1070 (the 62% Alternate Price Projection). This would form a flat complex corrective structure which whittled away more at time than price, and tired out both bulls and bears in whipsaw action. That whipsaw action could likely have been targeted at automated momentum trading — a more traditional ABC correction might have provided enough momentum for profitability, and the market likes to maximize losers. Automated momentum traders hadn’t been punished enough during the big rise and fall of Bitcoin in the previous couple of months, so expect choppy action to continue until they’ve paid their dues.

That concludes the Wave picture, so let’s look at the momentum picture. As of right now, we have Unconfirmed Downtrends for all of long, medium, and short term defined by the three displaced moving averages used in traditional DiNapoli-style trend analysis (3×3, 5×5, and 25×5):

Naturally we’re neither overbought nor oversold in this time frame. Both Stochastic and MACD are negative, so we’re also not seeing any entry signals just yet. The DiNapoli Trend entry consists of shorting (going against) the stochastic when all indicators and price action suggest that the stochastic is wrong. Right now, with trends down and MACD down, the Stochastic is not giving a contrary signal. After a low is made, this technique can be used to enter the subsequent uptrend on a correction, with very high reward:risk in a lower time frame (hourly bars). It’s all about context.

When it comes to support levels to the downside, the big three are $772, $724, and $638, as seen on the 4-Hour bars:

The $724 level existed on the first decline after Jan 6, and is the reason that the market stopped dead in its tracks at $720 on Jan 8. That level hasn’t been broken, but it sure would be an attractive target if downside momentum picks up. A Railroad Tracks (price rejection) and Wash-and-Rinse below that level would be an attractive entry. A lower time frame fibonacci or confluence entry could be considered on 1-Hour bars following the low, as well.

If price doesn’t get there, then the obvious target is $772, but the problem with this level is that there aren’t a lot of obvious stop losses there, since the low was at $783 on Jan 17. So a rout to the downside could lose steam quickly beyond $783 if there isn’t an obvious reason to push price to/through the support level. It will be fairly clear from the price action around that level which of the two is more likely, if that occurs.

To the upside, we’re looking at the Time Target of Jan 27 coming into play. If bears can’t push price down, they’ll throw in the towel and anticipate the upside. Right now it’s unclear which side will win, but time is running out and tension is building about the action into the weekend. If it remains low-volume and lethargic, the downside pressure could simply peter out and we could be looking at developing the other half of a cup-and-handle bottom over the next week.

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