Bitcoin update: Ugliness continues, even after a thousand point retrace off the 3450 area low. Often when there is a lower high, a lower low is more likely to follow. Wasn’t everyone saying this market reached bottom a week ago? You cannot go by what “everyone” says, especially in this space. This is why we are still looking for 2 pieces of evidence before we decide to continue taking trades, especially on the shorter term.

No One Knows

Ever look at the comment sections of my posts on Tradingview? They are littered with dozens of charts that beg for attention. Everyone draws arrows on their charts to show their “guess” as to where this market is going next. Everyone is entitled to their opinion, but the reality is no one knows.

Remember it is sentiment that drives prices, especially on the short term. You know why I don’t draw arrows on my charts? Because I let the market tell me, I do not assert my idea or “arrows” on the market.

The best thing you can do to get a perspective on where the market wants to go is to look at your own chart. No one else’s. The objective of the evaluation process should be to gain a sense of probability, NOT to get caught up in predictions.

Context Through Structure

There are many ways to gain a sense of context when evaluating a market. And as you gain experience, you begin to recognize what information is relevant, and what is useless. For example, what you see on TV can be categorized as useless. In fact you would probably do better by taking the opposite side of whatever the mainstream financial news presents. They are not in the business of being right or wrong, they get paid by monetizing your attention.

One way to simplify evaluating for context is by observing price structures. For example, Bitcoin has taken out the 6K support, and has now established a lower high around the 4400 area. That paints a bearish context, and until that changes it is reasonable to expect lower prices. No matter what any expert or financial reporter says. It is what the market is saying, and it is always right.

Bitcoin Chart Update
Bitcoin: Double bottom or lower low?
Anticipating Change

Bitcoin is likely to head lower, UNLESS is chooses not to. It is all about “IFs”. This is why being prepared for a multitude of scenarios makes for better decisions.

Even though the context is bearish, a double bottom can develop around the 3450 area. What if that happens? That changes things, but it does not mean you buy all in. It means the bearish momentum is not as dominant as it previously lead us to believe. It is a change, and by recognizing it, you are being flexible. It would be considered a sign of strength and a new argument that bulls can add to their support list. Will the strength continue and push resistance levels? Too early to tell, but it can begin with a double bottom.

What if instead, it fails to make a new low and begins to develop a new consolidation? It can happen. The key is to look for the signs as the market provides new information.

From our evaluation, since price could not come anywhere near the 4650 trend resistance, we are going to go with the probability of the negative environment and anticipate a new low. Unless the market proves otherwise. Remember predicting and anticipating are two different things. We don’t predict because it implies absolutes and there are none in a financial market, only probabilities.

New member? Read a recent Bitcoin analysis click here.

The Bottoming Process

We write it often: tops and bottoms are not an event, they are a process. It is possible that Bitcoin pushes to the 3K low, and reverses sharply. Then tries to retest the new low and fails. Do you know what that is called? An inverted head and shoulders. Often that is what a bottom looks like, and it takes time for it to play out. In this case it can take a number of weeks.

When the bottom is established, there is no way to know until after the fact. Confirmation means price has taken out some resistance levels or developed a new structure which is most likely no where near the lows that made up the “bottom”.

This is why bottom fishing is equivalent to gambling. Jumping in big at the low with the thinking, “how much lower can it go?”, or “this has to be the bottom.” is the recipe for wiping out your account. Ask all the investors who jumped in big at the 7K “bottom”, and 6K “bottom”.

Now if you are building inventory, and jumping in small, that is a different story. It is still a gamble, BUT by going small you are compensating for the possibility that the market can go much lower. You are acknowledging the risk, and protecting yourself from what can go wrong instead of focusing on the reward if you are right.

This is why we have rules that govern how much we can invest, and when to stop buying no matter how “cheap” the market becomes. These rules helped us to avoid enormous losses since we have been building inventory from 10K.

The Favorable Environment

Do you remember where this market was a year ago? Along with all the hype, promises, magic, and 30K predictions? That is an extreme example of a favorable environment. What is hard to imagine is that it can return, even if it is not as extreme.

The lesson here is: do not get sucked into the hype in either direction. Right now the hype is negative and pessimistic. And hated markets like these are the toughest to see the value in. The reality is these are the best markets to build inventory in, but carefully which means small. If Bitcoin goes to 1K, it should not really hurt, because you are small.

If Bitcoin has any merit, it is just a matter of time before renewed optimism returns. And it will most likely begin with an unexpected news item. From the initial news spike, the structure slowly changes and next thing you know, resistance levels start to get taken out. THAT is the time to be more aggressive, to take more chances, to hold on longer. The trade off is a favorable environment will not offer cheaper prices, instead it will offer better probabilities.

Focus On Questions

Everyone is always looking for answers instead of asking questions. Often the answers are on YOUR chart, not someone else’s cluttered “chart art”. And the questions are not about “where is it going next?” or “where is the bottom?”. They are “what if it goes to 2K?” and “can I take that kind of pain?”, if the answer is no then you are too big. The questions you should be asking should pertain to risk, not the direction or reward.

Price is poised to go lower, but that does not mean it will. You just need to be prepared. Think more in terms of probabilities and learn to recognize what favorable conditions look like. Look at the bigger picture, not the smaller and WAIT for the favorable patterns to appear. Until then, staying small or staying out is the best way play defense in a hard money environment.

Questions and comments welcome.
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3 Responses
  1. jlhequities

    I told Andrew this but you guys have really improved my trading. It’s taken me months and months to understand what your saying but now it’s starting to sink in. I appreciate you guys sharing knowledge.
    Also I like drawing pretty things on my chart, you know why, since I’ve started listening to you guys I am waiting 90% of the time for a trade so I need some entertainment. What better way than draw scenerios of things that may or may not ever happen 😉 but seriously you guys have helped me a lot and I appreciate your teaching.

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