Correction or Free Fall?

Saturday 14 June 2014

G'day! When we last posted the bitcoin market was holding up at around $650 (BitStamp) but as I write we are back down below $590 and the market's new found confidence appears to have evaporated.  As ever, a week is a long time in bitcoin.  

With this said, let's analyze what happened with the help of a chart...

BItScan bitcoin market analysis 14 jun

Regular readers of BItScan's market analysis will remember that in our last post, we suggested that notwithstanding the market's recent bull run, we were trading near rising resistance (upper purple diagonal line) so anyone desperate to iniate new (or add on to existing) long positions had better place a loss-stop at $630, because if the market traded back through this level, a steeper plunge was in the offing.

As you can see, having tendered this advice at Point 1, the market did trade back down through $630 at Point 2 and you can see what happened next.  

This is why it is absolutely imperative that active traders deploy loss-stops.

Remember, as market technicians we care little for the fundamantal reasons behind a rise or fall.  In this case the fall may be due to the US government's decision to auction off Silk Road bitcoins, or perhaps fear over a induced 51% attack is also weighing on market confidence.  Whether the fall is due to one, the other, a combination or something else entirely is of no interest to the market technician.  We accept that everything we need to know about market sentiment is contained within price itself...

...and currently price action has much to tell us.

Firstly, we can see that the market has fallen through horizontal support at $590, made a low of $550 and failed to bounce and hold back above $590.  In fact everything about the current (triangular) continuation pattern suggests that the market isn't done with this pull-back yet.  

With this is mind, we would see a re-test of the most recent low as a racing certainty.  Indeed, a test of key support at $540 is, in our opinion, almost certain and it wouldn't surprise us to see the market probe lower still, to the lower channel support line that represents the technical extreme of this up-trend.  This is what we have tried to indicate at Point 3, which is a moving feast that will climb gradually over the next week to co-incide with horizontal support at $540.

Basically, it's all about this support zone now. This is where investors and everyone else with a bullish bias will be looking to pick up a bargain, at the extreme of the markets current condition.  Knowing this, this zone is also where bitcoin bears are most likely to take in or lighten up on their shorts.  It is this combination of latent buy orders that has the best chance of reversing order flow and inducing a swing back to the upside.

And if this support zone fails, to hold-up, we can expect the market to give back the entirety of its recent gains.  Not a nice prospect for bitcoin bulls, we appreciate, but the technical picture is pretty emphatic.  If we come back through $540 at pace and fail to reverse powerfully back to the upside, bullish confidence is likely to shatter and the resulting order flow will accellerate the plunge.

This is why our fervent intention is to re-join the rally with a limit BUY at rising support.  

Why we cannot be sure that the market will reverse, we can be confident that if it's going to happen, it's probably going to happen from here.  If it does we will have secured more bitcoin at the very bottom of the correction.  And if it doesn't, a loss stop will take us out of the trade with our loss minimised.

It bares saying that we are likely to be feeling slightlly queezy as/if, this limit BUY is triggered, but then this is often the case with the trades that turn out to be our most profitable. 

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