Bitcoin (BTC/USD) has been consolidating directly below key resistance, and momentum seems to be slowing down since bitcoin’s tremendous 31.73% surge in price from the $6 425 ($8 391 CAD) recent lows.
The narrative, which has been widely circulated, is that bitcoin is following safe-haven assets, such as gold. When tension between the USA and Iran escalated last week, following reports of Iran’s missile attack on US forces in Iraq, there was a sharp move higher to $8 463 ($11 053 CAD). Bitcoin then corrected sharply after the situation was de-escalated and downplayed by President Trump.
Although this narrative does seem relevant after the price action has already played out, price action action itself can tell a more complete story, often before the start of the narrative’s timeline.
As American financier, Bernard Baruch, once said, “show me the charts and I’ll tell you the news”. Although coincidental, a narrative is often merely used as a catalyst to justify existing and predicted price action.
Today, 13 January 2020, also marks an important milestone for bitcoin, with the launch of Bitcoin Options by the CME group (one of the first regulated institutions to launch Bitcoin Futures).
This move by the CME group is expected to help bitcoin further in becoming more of a mainstream financial asset. According to Coinbase CEO, Brian Armstrong, “derivative products introduce bitcoin to a broader base of investors that hold vastly more wealth than individual and retail investors”.
Is this bullish news already priced in? Is this the beginning of a new larger impulse phase, or merely a corrective dead cat bounce before continuing the larger downtrend?
Although bitcoin has made significant ground since December 2019, it is still too early to claim that the bottom is truly in, and further confirmation is needed, in my opinion, before switching bias from bearish to bullish. This correction could merely be a relief rally before printing new weekly lows.
4-Hour Chart: Rising Wedge / Ending Diagonal
Looking at the 4-hour chart, bitcoin (BTC/USD) has been corrective since the $6 425 ($8 391 CAD) lows, and could potentially be in the process of printing what is known as an ending diagonal according to Elliot wave theory, as part of a larger C wave of an ABC correction off the lows. This contracting chart pattern can also be considered to be a rising wedge pattern, which begins wide and contracts as prices rise and the trading range narrows. This pattern has a bearish bias.
An ending diagonal is usually made up of 5 waves, and it is yet to be seen whether wave 5 is already complete as a truncated 5th wave (a weak 5th wave which ends lower than the end of the 3rd wave) which could see bitcoin start the next leg down from here, or whether wave 5 is still in the process of completing where we could potentially touch major resistance in the $8 600 – $8 762 ($11 231 – $11 442 CAD) resistance range before continuation of a larger down trend.
Judging by choppy price action, along with a failure to turn the major $8.2k ($10 708 CAD) and channel resistance into support, the $2k rally from $6 425 ($8 391 CAD) to the recent $8 463 ($11 052 CAD) swing high seems more corrective than impulsive. The Volume Based Momentum indicator is reflecting a hidden bearish divergence (oscillator reflects a higher high while price action does not) and volume has been declining since the $8 463 ($11 052 CAD) top.
Bulls will have their work cut out for them over the short-term, in order for the bullish momentum to continue, but there is still potential for one last wave 5 push to the $8600 – $8 762 ($11 231 – $11 442 CAD) resistance range if wave 5 is in-fact not truncated.
Daily Chart: Will the 100-day simple moving average continue to hold as support?
The 100-day simple moving average (MA100) has been holding strong over the past week, however bitcoin has a confluence of resistance converging directly above and ahead.
Bitcoin has still been unable to, as of yet, close above channel resistance, nor the $8.2k ($10 708 CAD) major resistance level on the daily chart. Neither has bitcoin been able to, as of yet, close above the 50% retracement level ($8 154 / $10 650 CAD) of the prior drop from $10 350 ($13 518 CAD) to the recent $6 425 ($8 391 CAD) lows, only managing a wick above this level with a recent swing high to $8 463 ($11 052 CAD) on 08 January 2020.
Bitcoin is fast approaching overbought territory on the Money Flow Index (MFI is a momentum oscillator which incorporates both price and volume in determining overbought and oversold conditions). MFI is also beginning to reflect a potential hidden bearish divergence on the daily chart, which can only become invalidated if bitcoin manages to break above $10 350 ($13 518 CAD), the October top, whilst in overbought territory.
The ADX/DI indicator (trend strength/trend direction) still reflects a bullish trend, with +DI (bullish direction indicator) above the -DI (bearish direction indicator) and with a slightly, yet gradually, increasing ADX (trend strength).
A potential move above the 0.618 (golden pocket) Fibonacci retracement level ($8 626 / $11 267 CAD) is still possible.
The way I see it, bitcoin has the potential for one last push to the $8 600 – $8 763 ($11 231 – $11 442 CAD) resistance range, but the mid-long term bias is still overall bearish. There has not been enough confirmation to signal a bottom as of yet, no red volume capitulation candle, no bullish divergence on the higher time frames and significant resistance directly above.
Weekly Chart: Channel resistance and slight hidden bearish divergence
There is now a slight / weak hidden bearish divergence signal printing on the weekly Money Flow Index (MFI), which can be seen more clearly on the daily chart, and on the ADX/DI indicator, there has been a convergence of the +DI and the -DI (directional indicators) with very low trend strength, reflecting indecision in the market.
Volume has picked up slightly on the weekly chart, but is still considerably lower than the October spike to $10 350 ($13 518 CAD).
If bitcoin is unable to close above the key $8 200 ($10 708 CAD) resistance level on the weekly chart, and instead closes below 100-week simple moving average support level instead (currently $7 175 / $9 373 CAD), there could then be potential for a new weekly low, potentially only finding major support in the $6 153 – $5 780 ($8 038 – $7 550 CAD) support range, which is between the 0.5 – 0.618 Fibonacci retracements levels (log) of the larger rise from $3 122 to $13 880, and suits the criteria for the end of a larger potential wave 2 correction.
Depending on volume and price action at the time, the $6 153 – $5 780 ($8 038 – $7 550 CAD) support range might potentially signal an eventual bottom to the corrective phase which most traders and investors have been waiting for.
Alternatively, bitcoin can still potentially capitulate to the 200-week simple moving average (MA200) (currently at $5 174 / $6 758 CAD) before finding bottom support, which could result in a drop below the 0.618 Fibonacci retracement level ($5 520 / $7 210 CAD on log) of the larger rise from $3 122 to $13 880 ($4 078 to $18 130 CAD), known as the Fibonacci golden pocket, and also suits the criteria for the end of a larger wave 2 correction (or wave B if the larger plan is corrective).
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