End of the Rally or a timely Pause?

Wednesday 04 June 2014

G'day! Price action over the last 48 hours merits a quick update as it's taken the bitcoin market to a key decision point.  Let's look at it on a chart:

BitScan BTC market analysis 3 jun 1

In previous posts we have talked about the upward sloping channel within which price action was being contained. Well, here it is again, defined by the purple tram lines joining the market's extreme swing points (annotated 1 - 6) since the beginning of April.

And as you can see, having first tried to punch through the top of this channel on Sunday, the market has had this trend channel limit under sustained attack for the last 24 hours.  This is a long time for any market to try and fail to achieve anything. 

It is always difficult for a market to break beyond a trend channel line into a steeper assent (or descent) and the bad news for trend traders is that if and when it fails, the most natural reaction is for price to reverse in search of the other side of the channel - which on this chart is down at $500. Uggghh.

How do we interpret this? Well, while it is of course possible for the bitcoin market to accelerate again, into an even steeper trend, this would not be sustainable indefinitely.  Indeed it would mark this trend's maturing from sustainable to mature (or 'blow-off') phase.  Also, there is a fair amount of resistance arrayed beyond the trend channel limit, from $710 through $800 and beyond.  What this means is that even if the the market does break to the up-side, there are plenty of trench lines against which counter-attacks will be launched and, as a result, the move may well be short lived.

Please be clear, we are not saying that this is definitively the end of the 'good-times'.  Only that we see gathering evidence that this may be a point in price that defines a pause in those good times.

From the bulls' perspective, the best case scenario might be a gentle retracement to the steep rising support line (green) to 'call in more reserves'.  A less palatable alternative would be a deeper plunge to horizontal support at $590, $540 or beyond.

The bottom line is that while investors need do nothing beyond watching with interest, more active traders really ought to be considering a reduction in exposure, to preserve profits in case of a reversal.

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