Bitcoin: Irrational Investors Provide Proportional Clues?

The Bitcoin retrace makes a little more progress while the herd over reacts as usual. The best thing you can do for yourself is to NOT react like your fellow investors or internet analysts. Do not get catch someone else’s opinion of how far this retrace IS going to go. Order flow may move in irrational ways, but the madness still manages to express itself with some form of proportionality. This article will highlight what kind of expectations are within reason, and what kind are much less likely.

No Opinion Works Better?

First, let’s address the extreme. Whenever Bitcoin exhibits some decisiveness (like a 1500 point move lower), everyone seems to get very opinionated. Bitcoin back to 4500! And all kinds of other predictions that are nothing more than pipe dreams conceived from watching too much chart porn. Small time frames, over complicated price projections, etc. Please do yourself a favor, tune it all out. The best opinion to have is none at all.

On that note, a day before the first signs of weakness became apparent,  we gave a heads up to our members by pointing out the ascending wedge formation. That, along with the 5 Waves of an Impulse structure, warned that the risk of retrace was particularly high. Meanwhile, the rest of the internet analysts were calling for 10K targets.

5 Waves mean when the retrace unfolds, it will most likely be of the same magnitude of the complete impulse structure. And that is where Elliott Wave can be very helpful, because it provides a framework or proportionality to help shape expectations that are relative to the market, NOT peoples feelings or opinions.

According to the guidelines of Elliott Wave Theory, the 5 wave Impulse can be considered a larger Wave 1. This means we are likely at the beginning of Wave 2 which is a corrective sequence that can unfold in a somewhat limited number of ways.

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Bitcoin: Proportional Clues?
Let the market decide where it wants to stabilize.

According to the 3 basic rules of an Impulse, Wave 2 should NOT retrace 100% of Wave 1. If it does, then it is not an Impulse Wave. The likelihood of such a scenario is low considering the recent fundamental shifts in the space (main stream brokerage houses getting in on the game). So anyone predicting Bitcoin going to 3K or lower is desperately seeking attention.

The more likely scenario, ESPECIALLY if Bitcoin is going to stay strong, is Wave 2 finds support at the .382 retrace of Wave 1 which provides a REALISTIC price point to anticipate stability. That price point is the 6750 area. Can price go lower than that? Sure, the next major level is the low 6100 area.

It is important to understand that corrective sequences are not simple. The typical structure consists of 3 waves, BUT anything more complex can be a compound correction which is just a fancy way of saying “range bound”. A break below 6750 is more likely to lead to such a consolidation phase which will prompt us to adjust our aggressiveness and expectations for buy signals that follow.

Can Bitcoin find support sooner? Yes. It is more important to be opinion free than it is to think in absolutes. The 6750 area is proportional, while 6100 is more extreme. It is ALSO very possible that Bitcoin finds stability sooner in the form of a reversal pattern around the low 7K area.

The key is to let Bitcoin provide the clues as to what it intends to do next. Carrying irrelevant opinions only limits your ability to adjust sooner, particularly when the market calls for it, not some internet analyst.

How Do You Define A Trade?

Part of having an open mind requires having a well organized decision making process. We emphasize this often with our members and is precisely why we offer two separate membership services. Our process guides all of our decisions from what setups to anticipate, where to anticipate them, how long to hold on for and if we should place a stop loss order or not.

Many who are new to the arena of market timing often think “a trade is a trade”, but as they find out quickly, this thinking is seriously flawed. Assuming risk in any financial market can be categorized in many ways. We separate our strategies by time horizon which serves as a starting point for the evaluation and position management process that follows. Are you confused as to when you should place a stop? Or how long you should hold your position for? You should be if you do not have such a process in place.

In summary, the current retrace unfolding in Bitcoin is nothing unusual. Having points of reference to anticipate herd behavior in the near future certainly allows for better preparation while minimizing reactive tendencies.

Investors as a group react in ways that unfold proportionally. Having the patience to wait for such a level is one thing, but ALSO being able to recognize confirmation at such levels and acting on it is something else. Right now it is up to Bitcoin to prove that it wants to develop a reversal sooner, or revisit one of the prominent support levels evaluated earlier. We simply sit back and let it tell us. No opinions necessary.

Questions and comments welcome.

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3 Responses
  1. onurerbas

    Hi Marc. Could we say that Bitcoin found support even sooner at the historical trendline which is roughly 7575 or is it too early to speak and it would bounce back from 8200? Cheers.

    1. Marc Principato

      Hi there and thank you for your question. I prefer to WAIT for confirmation of support which I do not see at the moment. Anything is possible but I think its too early. I would rather miss a move than jump in prematurely which costs a lot more in the long run. If Bitcoin is going to find a support sooner, it needs to show some kind of structure, not just a touch of a level.

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