BTC Market Update - 6 April

Sunday 06 April 2014

G'day!  Its been a while since our last market update but to be honest our last post kinda said it all.  To jog memories, on 13 March the market was trading at $640 (BitStamp) - a crucial price point - as we noted at the time and something of a last chance saloon for bitcoin bulls.  We advocated a BUY here on the basis that a losing trade would never cost less, so tight might a loss stop be placed.

In the event, of course, this turned ou to be exactly the case.  When the market refused to trade and hold back above $640, the sellers took charge, we banged out at $620 for a $20 loss per bitcoin and ever since the market has plummeted.

This is what failure at a key price point will do to you - every time - and it's why they are such powerful moments in the market to trade.

Anyway, time has moved on and we finally see the possibility of a change in the technical (and fundamental) headwinds that have buffeted bitcoin so meaningfully this year.  Allow us to explain with the help of a couple of charts...

This first chart gives a pretty emphatic account price action, from the market peak to where we now sit, and on it you can clearly see the downward sloping resistance line that has sent the market back into retreat every time it attempts to break out of its downtrend. You can also see the horizontal price points against which the biggest battles between bitcoin bulls and bears have been fought along the way.

In the broadest sense price action since the highs of early December really can be seen as nothing more than consolidation following a huge rally.  We have never traded back to below a 76% retracement of the entire move - which Fibonacci will tell you is the point that trend traders really need to worry - but this doesn't make it any less painful for a bitcoin investor to witness and as a young company whose operating capital is directly linked to the value of bitcoin, we can empathise with concerns in this regard.  

Also we need to be clear, that bitcoin may of course be far from the edge of the woods.  Looking back at the chart you will note that $380 has become a huge technical support zone but if this gets pierced the market is likely to plunge much further still.

However, notwithstanding all the gloom, it may just be that we are emerging into something of a clearing,

if not the edge of the woods themselves.

Look back (again) at the chart and you will note the green boxes we have transcribed against the most significant lows, joined by a light green shallowly sloping support line.  You will further note that the market re-tested this sloping support zone just last week and, so far, it's rallied away from it.

This is significant because of its proximity to the major horizontal support of $380.  Why did selling power run out so close to major support without actually testing it?

The technical fact is that sufficient buyers came in to the market to reverse the order flow early  - and this only happens because they don't want to risk missing out on a bargain, in the event that it never goes lower.

And that's food for thought, so let's home in and have a closer look...

So, we need to be absolutely clear that what we are about to propose is a high risk, active trade.  The market is in a downtrend and trading against the trend is a very risky business.  BUT, assuming those early buyers at around $400 are joined by others, there is room within the existing context for the market to rally back up to $540 without violating that trend.  We have already hopped in with a stop below the recent low and you might chance a small punt yourselves.

A purchase here actually makes sense from the longer term perspective - so long as you have the discipline to clear your book in the event that the market takes a nosedive through $380.

Because it just may be that this correction has run its course.

Now, this doesn't mean that we should expect a rapid reversal to challenge the highs. All markets - and particularly bitcoin - are susceptible to the psychology of the crowd.  They don't like changing their behavior.  We didn't reverse into this downtrend on a dime and we won't reverse out of it on one either.  The nascent counter-trend we are currently witnessing will fight its way back up to resistance and everyone will be watching to see what happens here.  Most likely price action will reverse at the first test and fall back into the range.  Back down we will come until sufficient buyers materialize to reverse the order flow.

This could go on for some time, BUT the longer it lasts, the greater the chance that resistance will eventually give, as less and less sellers are prepared to risk their money on a punt short. And when that resistance at $540 breaks - as it eventually will, we will be at the edge of the woods.  And you'll be feeling very proud of the risk you took down here at the first clearing...

As ever, fortune favours the brave...

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