A DEFCON System to Manage the Bear Psychology

Dear Readers,

Some say the market keeps us guessing…. or instead ask whether the top is in. But with the trend on the chart remaining solid, it’s perfectly reasonable to believe that price will continue upward in that trend. Not until a break of that trend should we begin to ask whether the top is [or was] in.

As they say, ‘the trend is your friend’ but what exactly is the trend you might ask. And so to the following chart:

The first thing to note is its relatively zoomed and without being too far so. The multi-year [not the multi decade] chart provides some perspective while also giving a trend on a larger time frame that effectively negates the shorter-term volatility as is found on the daily charts. It also frames the multi-year cycle that most are interested in. In this sense, it is not zoomed out too far. All things in moderation as they say.

That said, the traders among us [as opposed to the investors], or those looking to take a little profit at the peak, are going to be more interested in a shorter-term time frame that focuses on a more exact peak. First, the recognition or establishment of realities - for all practical purposes, the exact peak is not going to be sold, just as the exact bottom was never bought. One’s expectations should therefore be realistic, and accordingly be focused on doing good enough. [The desire for] perfection is the enemy of good.

A ‘DEFCON’ System

When zooming in on the shorter-term trends as they relate to a possible multi-year top, a degree of alarm could be set as a safeguard, something like a system of DEFCON levels, where 5 is stable and 1 is critical.

The established ‘bias’ or theory should be the expectation for continued upside within the multi-year trend. The future conditions which might serve to increasingly invalidate the theory, by degree, are the markers above [the longer-term trendline is weightier than the shorter-term lines]:

• 5 - Though a development, is nothing really to write home about. The break of the steepest multi-month upward trend while with horizontal support nearby
• 4 - Price through multi-month resistance come support
• 3 - Price through multi-year diagonal support. And here alarm might begin to register [signified by the larger 3 on the chart], and where price would be through the 100k mark
• 2 - Price falling out out of the wider multi-year channel
• 1 - Price finally making a lower low on the medium/ multi-month timeframe

This could also be considered a ‘stress-test’. The factors, as [or if] they accumulate would serve to invalidate the outlook of a continued bull run up. Until those factors mount up, the outlook should remain bullish. Considering how many conditions would first have to be triggered before price even made a lower low [on the medium-term], it is currently a very bullish chart.

A Likely Scenario in the More Immediate Term

The main point of this article is to defuse the growing alarm on daily volatility when it is not really warranted. And that the best way to do this is to provide some price levels, where that level of alarm might begin to be warranted.

Say price moved within this sideward range [as highlighted above] for the next month or so, this would be considered just Bitcoin normal - a ‘DEFCON 5’ event, which is a near non-event. And yet is is very likely that the psychology in the market will turn negative as that is not focused as it should be on the chart. What most people see is price move down thousands of dollars. Market psychology is focused on the nominal move [the number] and not the real move [the percentage]. Accordingly, some may well get shaken out before the likely next move up. The more price changes, the more market behavior stays the same.

Of course, the technical reading of the market syncs nicely also with a contrarian reading. That said, technicals and market psychology, though complementing each other, should be kept separate and considered different disciplines.

In summary, the aim of this article has been something of a counterpoint to the articles that sketch a possible top. It looks to outlines the various technical factors that would have to be met before a bearish view of the market would be warranted. In other words, it safeguards against getting spooked too soon and selling too early.

Edit: As I finish writing, I see ‘5’, the shortest trendline is broken… in the DEFCON system, this is a near non-event.

Until next time,

Stay [relatively] safe out there,

Dave the Wave.

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