Has the Bitcoin Market formed a bottom?

Sunday 11 May 2014

G'day! So, last month we saw the first counter-trend bounce we were looking for (see our last post), but as suspected, it got turned around by the wall of resistance at $540 (BitStamp) and we've been trading back in a range ever since.  And this is absolutely to be expected.  It is extrmely unusual for any market to reverse from one powerful trend, directly into the opposite trend.  Major trends are far more usually punctuated by periods of range-bound indecision, as market sentiment coalesces around a key point in price.

So with this in mind, our aim in this post is to zoom out, in an attempt to identify why the market likes these levels and what this may mean moving forward.

Let's look at our first chart.

At first glance, $400 appears, demonstrably, to have held the market up, but a closer look at the chart indicates sufficient variance in the actual price point that reversed order flow, to hint of some deeper phenomena at play - and this sparked our interest.

It took a while to identify but if you zoom out further still this is what you see...

On this Daily Chart we have plotted a rising support line that joins the 3 major lows of 2013 and then copied it to create a trend channel line anchored to the first major high of 2013.

What you see, immdeiately, is that this trend channel line continued to influence price action on the way up - during the second big rally of 2013 - and more recently, the way down; selling pressure never pressed the market back through it on a daily dasis so far in 2014.  

Hmmm, so this is interesting.  Let's take another step...

Now we've added a second trend channel line, slightly above the first, and finally we can see the technical 'line in the sand' against which buyers have been placing their orders, because on no less than 5 occasions since the second rally of 2013 commenced, this support line has forecast - to the dollar - the precise market low.  On only one occasion have we traded through it and this was rejected in the very next trading session.

Okay, so what does all this mean?

Well, as market technicians, attempting to identify points in the market that represent a good risk to reward ratio, we care less about the why than the where. Identifying a point in price that has so effectively reversed sentiment in the past is the most powerful tool in planning trades in the future and from what we can see, we are trading in the vicinity of one right now.  

To re-inforce this point we'll allow ourselves one more chart:

What this chart first shows is that the bitcoin market's decline has been contained within similar rails, which re-inforces the point that this really is how markets and price action evolve. 

But what is special about this chart is the right hand edge, where we can see that for the first time, the market is trading beyond the upper extreme of descending resistance.  

And this, for us, is a clear indication that the downtrend which has dominated the first half of 2014, is finally running out of steam.

It is, we stress, still early days but the effectiveness of rising support, in the face of repeated tests, together with the piercing of descending resistance, has confirmed the bias that provoked our our earlier purchase at these levels and gives us the confidence to recommend accumulation of bitcoin at current levels on an investment basis.

This isn't to suggest that the market can be expected to go paraboliic to the upside - anytime soon - but that we appear to be trading in the vicinity of a well established base. This therefore represents a sensible point in price to re-commence accumulation of bitcoin.

And this makes us smile...

Rob @ BitScan

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