BTC Stabilizing before Its Next Leg Lower

4 Jul 2022

BTCUSD

Enthusiastic Bottom-Picking Has Failed since November 10, 2021

BTCUSD has been stablizing since its sharp plunge lower in the first half of June 2022. After many experts and traders alike once again called a bottom in BTC in May 2022, BTC plunged yet again to new 52-week lows. The 1H June 2022 decline was approximately -45%. (measured from May 31, 2022 to June 18, 2022). This is why it's important to take with a huge grain of salt all the experts and traders with fancy charts who give advice to buy the so-called bottom each time a new low is made. How many times has the bottom been called since the ATH at 69,000? Numerous times, with each one being incorrect.

In fact, BTC has fallen nearly -45% since May 31, 2022, when many vocal bottom-pickers were encouraging traders / investors to buy the all-time low.

Technical Analysis Points to Further Downside

1. BTC has been in a severe downtrend that has shown no signs of reversing YTD. Downtrends are characterized by lower highs and lower lows, something an elementary school student could spot on daily, weekly and monthly charts of BTC.

2. The price action this past month continued the downtrend, with a -45% selloff from end of May 2022 (around 32,195.68) to the low on June 18, 2022 (around 17,592).

3. Since June 18, 2022, price has consolidated and stabilized somewhat. This is a common occurrence between major legs of a decline.

4. In fact, a bear flag has formed in the past two weeks. The definition of a bear flag is a quiet parallel trading range that runs countertrend. This flag suggests that prices may soon breakout below the lower upward trendline to continue the downtrend. But first, BTC's price may continue to move sideways to slightly higher for a few days more within the channel / flag. Price might even reach the upper trendline (the return line) before heading lower. If price reached the upper trendline of the flag, then that would put price around 22,500 to 22,700.

4. Price has been crawling along the lower trendline, which constitutes bearish price action that warrants watching closely. An oft-cited technical guideline is that when prices in a downtrend decline to a rising trendline—essentially a corrective, countertrend bounce within that downtrend—and then prices crawl along the trendline as they have been doing the last few days, prepare for a bearish breakout below the trendline. Repeated bumping / tagging of a trendline increase the changes of its violation. (Donchian trading guidelines)

5. When a downtrend has persistent powerfully (or an uptrend), the probabilities favor trend continuation rather than trend reversal during retracements / countertrend moves back to support. The reason retracements can be so sharp is that many traders try to pick the bottom, which combines with short covering to create some of the strongest rallies that occur. In fact, the most powerful rallies generally occur in bear markets.

6. The consolidation has been tight and compressed, especially on the 2-hour and 4-hour time frames. On these time frames, the 2-standard deviation Bollinger Bands have compressed a great deal. Compressed volatility is usually followed by an increase in volatility (and vice versa) which accompanies a sharp directional price move. Be prepared for a major price move in coming days, and watch the parallel channel containing the price action for a breakout to determine direction—most likely downward for all the reasons given.

6. In a prior post, I pointed out some key Fibonacci price levels to watch over the next few days in addition to the parallel trendlines. See links below. In short, the key Fibonacci price level today and tomorrow will be the .618 retracement of the bounce off the June 18 low, which comes in around 19,165 to 19,225 depending on whether BTC's Coinbase or Bitstamp chart is being viewed.

Most importantly, anything can happen in the markets. Technical analysis seeks to identify higher probability price paths. But because anything can happen, staying open and flexible, willing to change the viewpoint based on new price data, can help immensely.

For those in the United States, enjoy your 4th of July holiday.

DISCLAIMER: This content is meant for educational purposes only; it is not intended as financial, investment, or trading advice. So please do your own due diligence and understand the given asset or instrument being traded as well as its risks in light of your personal financial situation.

4 Jul 2022

Catatan

Note the declining volume on BTC's daily chart, which is a classic feature of bear flags. The declining volume is shown by the large purple arrow in the volume subgraph below price.

8 Jul 2022

Catatan

It looks like the top of the bear-flag price channel has not yet been exceeded / violated. Short thesis still intact. Bear flag still valid. Looking for a breakout of the lower trendline of the bear flag next. But I'm staying open to price doing something different and unexpected.

12 Jul 2022

Catatan

And BTC is at a make-or-break level here at the bottom of the bear-flag channel. It's trading right around this level.