Overview of BTC Price Action
I was about to launch into yet again a more theoretical article on the nature of TA, but given last fortnight’s article was theoretical in nature thought it was the turn of the more practical. And of course, at this particular juncture in the market, the ranks of the undecided seem to be swelling as BTC price action remains subdued, over a prolonged period, as compared to the previous parabolic move in the first part of this year. The pendulum of market sentiment swings, and bulls are now not quite so adamant on what price will do in the immediate or near future, while a new breed of bears are becoming increasingly confident of ever new lows. This article will look to both explain recent price action, in the context of a previous parabolic rise, and go on to further predict the near future/ medium term of price action in the context of that same parabolic rise.
In my vocabulary, medium term refers to multiple month projections [long term being on the yearly scale], and so the intention here will be to sketch out, on the basis of a technical analysis, the trend of the final quarter of this year. Must price follow the course prescribed for it? Of course not. This is TA. The trick is neither to expect too much [the dogmatists] nor too little [the cynics] from it as discussed here. I’ll proceed on the basis of time-frames, the longest to the shortest, where of course the higher probability of a correct reading belongs to the highest time frame, and the lowest to the shortest time frame. As I mention often, not all charts are created equal - longer-term charts are in principle given more weight [see article linked above], whereas the shortest term charts are effectively a coin-toss.
The Long Term and the Model
As most are familiar, the long term chart is the Logarithmic Growth Curve [the LGC]. This can also be considered a model. It continues to perform well with price still in the upper echelon though near to the median band. Where previously there was pressure on the LGC channel, with price threatening to break the top side, currently there is no pressure whatsoever on the LGC model - there is plenty of room for price to run to both the top side and the bottom side of the channel. In this sense, the LGC model was further validated as it faced a crucial test at the top, in its prediction of a correction, just as it faced a crucial test at the bottom, in its prediction of support [all in real time as was developed at the end of 2018]. Crucial tests are exactly what we want in order to further validate the use of a model for longer term price prediction.
Of course, this longer term model can not help with price predictions in the more medium term, which is where a more focused medium term TA enters the picture. There is a trade-off involved here - the more interested we are in predicting what price will do in the nearer future, the lesser probability that prediction has of eventuating. Whereas you could quarter-expect the LGC to fail [a 75% ‘certainty’ say], the medium term TA you’d third-expect to fail [a 66% certainty]. Medium term TA, by its nature, is less certain than the long term model simply because its parameters are going to be reduced, which increases the odds of it being invalidated. This should in no way be considered a negative, for it’s just the nature of the beast - TA should be considered a game, where you’d aim to ‘win’ most of your calls, while recognizing your going to lose a few.
The Medium Term
And so to the medium term TA, which I am guessing most are more interested in at this particular juncture. Where the model is more relevant to the hodler and the investor, to those focused on the longer term price action that smooths out the ultimately inconsequential volatility in the interim, the medium term TA is more relevant to those that recently bought, or are looking to buy, to the new entrants. It is my particular interpretation of the Bitcoin market that the speculative element is just as significant as the fundamentals. You could think of the two in a dialectical dance of sorts, with that being played out on the volatile chart. With this in mind, I wrote of the BTC market becoming a series of speculative booms and busts, where a series of manias would dominate the chart, manias composed of first the parabolic run and then its correction. The idea [all observations are theory-laden] being that though BTC is itself not a bubble per se, it is bubble-like at times [further reading on this can be found here].
And so what you see in the chart is a series of parabolic runs that traverse the width of the LGC channel. The recent rise is one such speculative boom, and so can therefore be compared, with the use of TA tools, to the previous booms [or bull markets]. After the break of a parabola comes the extended correction, and it is the task of the medium term TA to map this. Like a bucking bronco, it is a challenge, for BTC is in a long term [secular] bull market. But the chartist enjoys the challenge. Remember, TA is primarily a game and not to be supposed some exercise in propaganda, market manipulation, FUD and the like. These kinds of interpretations says more about the mindset of the cynic than it does about the actual TA. And so to the medium term TA.
Given the history, there is a reasonable case to be made out for an extended correction of the recent parabolic rise, within the shaded downward channel, over the course of this last quarter of the year. The time fibs give the comparable lengths of time corrections take from the peaks. The price level fibs, measuring the y axis [price on the logarithmic scale], give the relative corrections of the parabolas/ booms - between 50 and 61%. I have dis-counted the capitulation event after the early 2019 mini parabola due to its having broken the downward trend, to the unusual event itself, and to the fact that a 50% correction was already achieved. Add to this the danger of looking for ever new lows on corrections in an ongoing bull market, and I think these fib levels suffice. Yet another consideration is the changing dynamic of this market - just as the blow-off top was absent this time around, so too might that capitulation spike to the downside be in the near future. My explanation for this is a qualitative change in the market that observes a general principle - as a market becomes increasingly liquid, increasingly mature, there is a reduction in the macro/ cyclical volatility [further reading on this here].
The medium term TA, is simply the correction of price within the downward channel, finding support at the identified fib levels. It would be invalidated on a significant break of the channel to the upside with price making a higher local low [say 53K].
And there we would finish our analysis having not asked too much of TA, yet still with a 33% chance of being invalidated, were it not the curiosity of most to know [or imagine] what price will do in the even nearer future, where the odds of predictive TA getting it right even further diminishes… to say a 50/ 50 coin toss. Why bother with the short term TA that only has a 50% ‘certainty’ you might ask . Besides meeting the obvious ‘demand’ for such, I think it is useful in so far as it provides real possibilities and alternatives to ‘bear’ and ‘bull’ narratives that would paint a one-way picture. More often than not, these narratives tend to disappoint, which can in turn only become the occasion for increased anxiety. Better, in my opinion, to provide a realistic [and fallible] analysis that does not provide too great an expectation. And so onto the short term TA.
The Short Term
After a fractal having played out [as seen on the top chart], the dominant trend on the shorter time-frame is the downward channel as highlighted [similar to the downward channel as highlighted above on the medium term time-frame]. If price can break first the downward diagonal and then the horizontal range [currently in the same area around 44.8K] then the short term TA would be invalidated. Would this then mean an end to the correction? No, for the medium term TA is also still in play [superseding it], which, if you go back to that less steep channel on that chart above, you can see some more work would need to be done to turn around the dominant downward trend at play there.
Over-all, on the highest time-frame, the picture continues to be bullish. It’s only on the lower time frames that an extended correction, for now, continues to play out. For the outlook to turn bullish in the more immediate time-frames, price would have to cross certain key levels as outlined above [the breaking of both short term and medium term downward channels]. Of course, this hardly affects those that bought what I’ve termed the buy zone, before the parabolas really got going [which is the lower band as seen on the LGC in the first charts above] - volatility is only to be expected in the Crypto markets. As always, it’s those that bought high that are going to be more concerned about prices at this particular juncture. Given the longer term trend, and the fact that TA is fallible, they may choose to hold, and then even be fine should their positions go under water for a bit. Or they may choose to de-risk a little. There is no abstract and right answer to this as it all depends on wider positions, investments, risk appetites, time preferences, among a myriad of other things that only the actual trader/ hodler/ investor is completely aware of . All the TA can do is offer a stress-test of sorts, and say something like this could very well eventuate.
Until next time,
Stay [relatively] safe out there,
Dave the Wave.