That'll be a 30% gain, then. Nice...

Monday 26 May 2014

G'day!  So, the market just tapped our stretch target of $590 on BitStamp, completing a 30% rip since we called the BUY at around $450. Wow - happy days.  Let's re-live it on a chart...

BitScan BTC Market Analysis 26 May

Working from the left hand side of the chart, the first indication that the downtrend is weakening is the breakout beyond sloping resistance. The market then re-tests sloping resistance as support no less than 4 times before settleing into a narrow range against well defined, long-term rising support and this is when we advised the BUY on an investment basis (basically, buy and hold).  When the market finally starts to move in our favour it first targets $540 which had, for the last month or so, reversed any counter-trend buying spike.  We warned of a short term reversal from this area and advised active traders to consider lightening up their positions in anticipation of it.  As you can see we did experience a small retracement against this key resistance point but then yesterday, fresh buying generated a secondary impulse that has since powered the market up to the next resistance line at $590.

On the one hand this is all very bullish.  Just a week ago we were tentatively forecasting the market's potential to test the upper limit of it's range.  Seven days later, not only have we tested this upper limit but we've blown through it.

But before we all get carried away, throw in our jobs and bet the farm let's take a step back to consider what is most likely to happen next.

And as ever let us start with a chart:

BitScan BTC Market Analysis 26 May 2

Okay, so on the one hand, we can see - again - that the market has broken through and held above that key resistance point of $540 on a daily basis.  Secondly we can see that from a technical perspective, the market may be establishing itself within a wide, upward trending channel (purple tram lines), which would present us with a reasonable near-term upside target of anywhere between $650 and $710.

But, on the other, I'd like to draw your attention to 2 things.  Firstly, having broken through major resistance the market's natural inclination will be to re-test it as support.  Why markets do this is a  whole other conversation but if you spend just a few minutes looking over this chart, or the first in this post, you will see ample evidence that this is just what they do.  Secondly, you will see that above resistance at $590, the market is moving into quite a 'noisy' space, with lots of swing points stacked up on each other.

With this in mind lets's consider our options:

Firstly, from the investors perspective, if you took our advice to scale in at $450, you can allow yourself a quiet smile and move your loss stop to break even, content in the knowledge that if the market returns to this area of price in the near term, you no longer want to be long.  Further, you won't even consider adding any further to your position unless or until we see a strong rejection of $540 as support.  If the market powers on to the upside without this retracement, sobeit.  We have a position and its all gravy from here. Happy days...

From the active traders perspective the situation is slightly more nuanced.  Assuming you bought at $450 - almost certainly at a heavier weight than the investor - you ought at least to have lightened up at resistance and I would forgive you for being totally flat again by this point.  If you have done neither you should, in our view, at least be tightening your stop loss right in, to protect your profit in the case of a reversal.  Whatever, you too should be watching the support line at $540 like a hawk, as a retest of this key swing level as support may well set up your next punt long.  Again, if we ses no retracement do not sweat it, another chance will present and with any luck we'll be ahead of the market to cue you into it.

In the meantime, we should stress that as 'value' traders (see numerous earlier posts for an idea of what this means) we do not consider this a sensible point in price to be either buying or adding on to a long position.  While momentum traders might disagree, our view is that the value trade has come and gone.  That bus left the station at $450 and its carried us to the stop at $590; representing a 30% increase in the value of our position.  To expect the market to do more, with meaningful resistance just overhead, does not represent a sensible risk to reward ratio.  The traders equation is, at theses levels, all wrong.


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