Bitcoin – Do You Believe In Magic? The Three Tenets of TA

Overview:

Bitcoin is struggling to hold support at 3500, and the alt market is simply struggling to survive.   We would have not imagined being at these levels only a few weeks ago.  Sure there were those that were calling for the collapse and final capitulation, but the fact is after a long two month consolidation the final breakout direction is unknown.

In general, the longer and instrument consolidates, the stronger the breakout.  What is never known until it happens is the direction of the breakout.  More into this in a bit but let’s first go over the three tenets in markets.

The Three Tenets and Magic:

There are three general tenets in Technical Analysis.

  • History Repeats
  • Markets Trend
  • Markets are a Discounting Mechanism

Let’s get a better understanding of each of these.  We can look to understand how markets move, or believe in some sort of “Magic”.  Let’s squash this right away, there are no magical indicators, oscillators or methods in trading or investing, only speculation and emotional stamina.

“Be careful on what tools you spend money: there are no magic solutions. Success cannot be bought, only earned.”  Alexander Elder

History repeats is the obvious one.  Markets trend, implies a trend is more likely to continue than reverse.  But often the third is often a forgotten piece of information, “Markets are a Discounting Mechanism”.

What is implied here is that the all available information, including present and “potential future” events are reflective in the current price at any time.  In simple words the market discounts all known information and is reflective in the price.

BTCUSD 12 hour:

After two months of a range bound horizontal market, Bitcoin finally broke out to the downside.  Because it did not quickly recover, we assumed a downward trend, and cancelled our two outstanding staggered orders.  This is risk management, and the recognition that markets trends are more likely to continue than reverse.

The current down trend is still in tact, and using simple trend lines we can see both a more technical trend line as well as a well developed trend channel.  We will go into more of this in our upcoming Webinar on “The Art of Trendlines”, which is in production currently, but the chart is self explanatory.

Until we see a change in trend, we assume the trend remains in tact and since we do not short these markets, just step aside.  Support has not changed at the 3500 and 3100 levels.  This does not imply we can not move lower, but forecasting and predicting how low we can go is simply guessing.  We take one level at a time period and since we have given up over 80% of the broader move from 2014, the actual next support level in my opinion is around $150 – $200. 

Whoaa There:

We do not have to move that low, and I personally think the chance of this is slim to none, but slim is back in town and we never discount anything.   What we are looking for is some sign of a bottom.  Now picking bottoms is seldom done for two reasons.

1st :  When the market looks just down out nasty, you have to step in.  Few have the courage to step into a market at the worst possible time. 

2nd:  There is no indicator, oscillator or price action mechanism that will signal the bottom.  Again there is no “Magical Method” that says “this is it”.

Bottom line you need courage and luck to time a bottom, few have one or the other, and most people have neither.

BTCUSD Daily:

 

I backed up the chart just prior to the current selloff.  No matter how many trend lines I draw, either bearish or bullish, after about mid October there was no trend.  Both the bearish and bullish trend lines were broken.  Now sure I could fit something, but two points are a line, not a trend.  I like to see multiple tests of the line. 

Think of the new Goldbug1 Nike shoe.  If you go to the mall and you see two people out 500 wearing them is that a trend?  Not likely, but if you see 30 or 40 wearing them, you can say there is likely a trend here. Same with trend lines, at least in my opinion.

This is why I have the big large magenta trend line shown.  Regardless of the spikes and dips, the main price action was around this line.  You can see the consolidation areas, where it was also support and resistance.  So in my opinion there really was no trend over that period of time, I consider this a range bound horizontal trend less market.

Now I’m going to get someone that says, there are numerous trends there.  Yes in the shorter term there are, but after about Sept 4th show me a distinct one over a period of  time.  I drew several trends lines in orange and both the bullish and bearish short term trends were eventually broken.

Range Bound:

So for two months, starting in early September there was no distinct trend.  During non trending markets oscillators and indicators are pretty much useless.  These are trending tools not “magical wands”.  Anyone using these on a 12 hour chart or better was pretty much looking at a scrambled TV.  Remember when you had to tell your younger brother to go out and adjust the Antenna?

If someone claims their indicator or series of divergent oscillators was the crystal ball that called it, well it was more likely luck than magic.  

Market Discounting:

This brings us to the 3rd tenet of technical analysis.  During this phase the market effectively discounted the price of Bitcoin to around 6400 to 6500.  As time move along more and more participants join as they speculate the next swing.  The market was simply discounting all the relative information available at that time and the fair market value of Bitcoin was 6400-6500. 

Traders see a range bound market and start to short the upper range, and buy into the lower range.  This attracts more and more traders looking for an easy trade.  Since stops for shorts were likely above the upper range, and longs slightly below the lower range, this accumulation period results in a crowded range bound trade.

So what happens?

You notice volume started to taper off from about October 15th where we entered a good long stretch of very low volume for a couple weeks.  As I mentioned in the “Big Raid” article large operators that have been accumulating during this period, see an opportunity to raid a market.

Say a few operators get together, and they have a combined total of 30k Bitcoin.  They stagger their orders at lower levels, say 5200, 4800, 4200, 3800 which are hidden. People start to get discouraged, traders are positioned for a breakout, and volume is low, so they start selling into the long stops. 

The stops become sell orders continuing to pressure the market downward.  Those that bought during the long consolidation, already discouraged, become sellers as well.  All this selling creates allows the large operators to now accumulate the coins they just sold at 6000 at lower prices increasing their inventory without adding more money.

Why Would They do This?

Quite simple, they know something we do not know.  Insiders have information that the public simply does not have.  I’m speculating here, but what if they know the SEC is going to allow an ETF, they are jumping ahead of the market that has not discounted this news yet. 

Now I should not say the market has not discounted it, many believe, including myself, that an ETF is definitely in the making.  We just do not know when.  Actually Switzerland just approved the first one ironically two days after the selloff.  Regardless the price from Sept – Nov discounted the possibility of an ETF being approved.  Again discounting probability and an actual fact are two different things.

We see this all the time on CNBC with economist telling us 83% of fund managers are pricing in 3 rate hikes, or 90% of fund managers have priced in a December rate hike.  If the FED comes out in December and decides not to raise, the stock market will rally.  Why because the market has already discounted a position.  We see this all the time with stocks selling off after an earnings beat.  Why?  Because the good news was already discounted in the current price.

This is also why you often hear us mention, I want to take the other side of the trade.  If the market is pricing in 3 rate hikes, the price movement is limited as it is already priced in.  However a dovish tone, and now the market re-adjusts to the new information and it does this quickly.  Unfortunately us retail investors do not have inside information or happen to take Uber rides with Fed members before rate releases.

The real question is who is buying here and who is selling.

BTCUSD Daily:

Regardless of a red or green volume bar, markets are a zero sum game.  For every buyer there is a seller at any point in the market.  So who is buying here?  Are you buying?  Is your brother, cousin, aunt or uncle buying?  Is your best friend Louie buying here?  I know Louie is always on the right side of the trade, he reminds me all the time before he has to borrow $15 for lunch.

Those are huge volume spikes and even though the trend is down, someone is absorbing the sell volume here.  Is it you?  Is it the bozos on trading view with their 2k trading accounts leveraged on BitMex to the hilt?  Probably not; it is most likely large operators as Wyckoff detailed in his 1937 book.

So why not jump in here?

One challenge with cost averaging is funds are limited.  I have an article in que for long term cost averaging that I will publish shortly, but bottom line our funds are finite.

We are not trying to buy the bottom, we are avoiding trying to catch a falling knife here.  Is this the bottom?  Well Bitcoin is still trending lower, and what we are looking for is evidence that provides a higher probability we are near a bottom.  We just do not see that yet.

Could this be a wrong assumption, and the insiders have information that an ETF or other like type instruments will NOT be approved and sold ahead of the news.  Nobody really knows for sure, so what do we look for?

We want to see a structure and pattern that provides a higher probability that we reached a bottom.  That is it, however the question is; where is it?  Well unless you believe in “Magic”, not even the large operators know.  See markets can remain bullish longer than shorts can remain liquid, but the opposite is true as well.

Markets can remain bearish longer than we can cost average into them.  If I was looking to add for the first time, I would surely be buying a little here.  There is also no reason for those with greater means to be adding a small positions as well.  However in our account we have a finite amount of capital, and I have found over the years that being patient is often the best position to take until we see some structure.  Before I get the comment, well you bought higher, yes we did, but we also kept cash ready in the event we moved lower.  Think about it, if I was 100% positive we were going higher, I would be all in.  No different than having the nuts in poker.

Summary:

As a long term investor, I believe in the space and believe Bitcoin along with a handful of other coins will recover.  It may be a week, a month or a year.  Nobody knows for certain.  All we can do is position ourselves the best IF and when a bull market resumes. 

If market selloffs like this and the S&P for that matter, discourage you, depress you, have you throwing the computer monitor, it is likely you do not have the temperament required to trade or invest.  In the end, it is not you against the market, you are trading and investing against yourself!  Period!

So those who keep searching for the magical methods to investing and trading, it is a long crowded search.  There is no crystal ball, or any indicator, oscillator, news, fundamentals, or any other type of information, that is not already priced into the market.  Yes your oscillators and indicators are already priced in!

As speculators we look for the footprints of the insiders, and that is found in price structure.  It is like putting out a feeler bet at the poker table.  How someone bets, how someone reacts, this gives us an idea of the hand they hold.  Not that we or you will always be right, anything can happen, but it provides greater probabilities of success in the long term.  

 

 

 

 

 

 

 

 

5 Responses
  1. javier.trader

    Hi Andrew! Very nice analysis!
    Just a question
    You have said next support level $150 – 200?

    By the way I sent a couple of emails Did you teceived them?
    Thank’s a lot!

    1. Andrew Gonci

      Hi Javier, I did not see them, can you please resend? Thanks

      Yes $150 -$200 a retest of the 2014 low. There is a support resistance level around $1000, but again these are just numbers and I do not want to scare anyone, but they are a possibility.

      Thanks

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