For someone who has been in this game for some time now, it still never ceases to amaze me how negative the sentiment turns on price corrections after a bullish run up. If anything, this is what technical analysis is for - it should serve to correct the negative sentiment that comes subsequent to corrections in price. A large part of this overly negative sentiment is due in my opinion to the phenomenon of money illusion, and so this article will look to discuss this phenomenon further before going on to technical analysis proper as it relates to the current correction.
Money illusion is nothing other than a focus on the nominal value of money at the expense of its real value. The nominal value is found in the numbers or units of money while the real value of money is found insofar as it is relative to something else. So for example, we are all familiar with the effects of monetary inflation, where if one were only focused on sitting on those units of money they would soon become worth-less [relative to real stuff]. Just as in macro-economics, so too in technical analysis - if we are too focused on the numbers, we will miss the actual real moves in the price. What I mean here is that when the numbers get big [as they are in Bitcoin], it’s the percentages of the moves that only really mean anything, i.e.; a $1000 move a few years ago meant something quite different to a $1000 dollar move today. And yet, many fail to make the mental adjustment. As can be seen in the following chart, a 1K move today is a mere 2% move as compared to a full 30% move a few years back.
This is also the mindset of the investor, on the longer-term time-frame, where ROI [return on investment] is king. And yet, too often, we can get too ‘up close and personal’ with the chart, where our sole focus becomes the moves of the day. Here we lose our rational detachment to the object of our investment, and enter into the equivalent of an amusement park with all its roller-coaster thrills and spills. To paraphrase Dante’s sign marking the entrance to hell, ‘abandon all reason ye that enter here’, for sentiment is now in the driver’s seat. And so, zoomed in on the daily chart as below, we see no real rhyme or reason to suggest whether price is ‘bullish or bearish’. If anything, it appears a bit scary.
Zoomed in on the Current Correction
As mentioned above, on the daily chart we can come to focus too much on the daily fluctuations of a volatile nominal value, on the number. So for example, we see a recent $4000 price drop…. and after a previous $6000 rise.
See a series of these [as you do on the chart], and it is nearly enough to emotionally exhaust those that are strapped into the rollercoaster of daily price. The problem here is one of giving too much significance to the nominal value [numbers] of those moves, which is the essence of money illusion.
Better, as a corrective to this kind of disorientation, is a re-focus on the percentages as opposed to the numbers. In this scenario, the numbers almost become irrelevant. Here we see a 25% rise followed on by a 12.5% decline…. and then perhaps begin to think of this kind of volatility as ‘Bitcoin normal’, the nature of the beast.
And though I said this approach is better, yet I still do not think it is the best. For the optimal approach to the chart, I think you need to do something like the opposite to the… sub-optimal. Instead of zooming in, what’s required is a zooming out, where in doing so a context is provided for the fluctuations and volatility of price. Those prices can then be analyzed in a more rational and technical manner, which brings me to the final part of the article - technical analysis proper as it relates to the current correction.
Zoomed out on the Current Correction
Of course, in ‘zooming out’, it is a matter of degree - we need to be zoomed out enough [not too much] on the chart in order to provide context and then make sense of the current correction within that context. This can then in turn provide the real values of the moves as opposed to either nominal values/ numbers and even the better nominal percentages. While a focus on percentages is an improvement on mere prices, so too is a focus on real values, at the more macro level, an improvement on mere nominal percentages. And so to the chart, with context and real values in mind:
First, the levels of the fib above measures the rate of appreciation, the ROI, on the vertical/ y axis [real value]. They also give the likely retracement levels of the solid move up over the course of the year. A 38% or even 50% retracement relative to the previous move, from the technical perspective, can be considered a healthy consolidation of price.
The weekly MACD also shows a bullish momentum with price still above the zero-line while, and suggesting a consolidation back to this line. Combine this analysis on the weekly chart with the macro on the monthly chart, and you not only have a basis for continued confidence but a rationale for the investor to actually buy if unexposed or under-exposed to this asset.
The Macro Chart
Once again context. Just as an analysis of this past year’s movement in price provides context for the current situation, so too does a macro analysis of the multiple year movement in price [even further zoomed out] provide context for this past year’s movement in price. And here you see that price has ranged in the shaded ‘buy-zone’ - in what has been identified for five years now, on the basis of the LGC model [the development of a Logarithmic Growth Curve], as the optimal entry level for the investor.
It is also on this macro chart that the phenomenon of ‘money illusion’, that naturally affects us all, is most effectively dealt with, for the y axis of price, on the logarithmic scale, keeps ROI [return on investment] first and foremost in mind. We can see that even though higher on the chart the prices get very large, the real value [in percentage terms] of the movement/ volatility of those prices are a lot more ‘compressed’ as relative to the volatility at lower prices. The first chart of this article is a good example of this.
Keep in mind that a particular trait of money illusion is to become used to prices at a certain level. What I mean here is that in the present, currentprices seem expensive as relative to the recent past [to the prices we were used to]. The flip side of this is that past prices seem cheap as relative to the present. What technical analysis can do for us is to provide a set of instruments whereby we can reject this ‘seeming’ or appearances of things [money illusion] for a more objective view as to the way in which, at a more rational level, price is progressing. The parallel here is the pilot, who refuses to ‘fly by the seat of their pants’ [sentiment] and instead trusts the instruments of their cockpit. And of course, though there is still no absolute certainty here, what is certain is that the odds of landing safely become vastly improved.
It’s been my aim in this article to give some kind of explanation as to why sentiment is so negative at the moment even while price development continues to look positive at the technical level. We all know that prices drive sentiment - that when high we’re exuberant, and that when low we’re despondent. It’s been my intention here to delve into this a little more deeply with a focus on money illusion. For when we see behind the curtain and see the way something works, we become much less susceptible to being over-awed by it.