December 31, 2017

A Purely Technical Analysis of Bitcoin From a Famed Technical Analyst

(Full Disclosure: I do not own any cryptocurrencies, nor do I encourage anyone of owning cryptocurrencies. It is illegal to do so in many countries, so do your own careful due diligence. Stay informed of the laws and regulations of your country of residence so as not to do anything illegal. What follows is for information only.)

For a technical analyst (not boasting but I am a Chartered Market Technician, as is Michael Kahn of Barron's, the author of the quoted passage below), the insane moves of Bitcoin are heaven sent for applying the dark arts on. 

Mr. Kahn has written a great article doing just that on 12/28/2017 at 3:27 pm U.S. Eastern Time. Noting the exact date of the article is of the utmost importance with such a fast-changing financial instrument. I'm not crazy enough to endorse his analysis. Do as I did, read it with a grain of salt. 

He's an honest, experienced and extremely competent technical analyst. But, as I always said, technical analysis is a great tool for describing price action, it is however much less adept at predicting price action. So do your own due diligence and, as with all very volatile financial products, think loss protection and ruin avoidance first and foremost. I strongly discourage anyone from investing more than a very small percentage of their risk capital in bitcoin-related products, simply because the probability of losing it all is very high. Avoiding them altogether would also be a smart strategy! 

I must admit, however, that following the gyrations of cryptocurrencies on a chart, with a few technical indicators (Bollinger Bands, 11-period and 22-period Exponential Moving Averages), using Japanese Candles and, most important of all, a logarithmic scale, is fascinating to any pure technical analyst worth his or her salt!

Let me end this entry with an excerpt from Michael Kahn's post (he is, which is a good indication of his professionalism and competence, very careful about all his pronouncements):

"[...] With bitcoin, there are no analyst guesstimates about future earnings. There are no interest-rate worries. There are no macro- or micro-economic concerns to distract from the charts. And there are no artificial market hours to create trading surges at regulated times.
As Chris Carolan, proprietor of SpiralCalendar.com, put it, “The bitcoin time series is the purest expression of human fear and greed response cycles ever constructed.”
Carolan also pointed out that trading action since the start of the year followed an arc based on the Fibonacci series. He called it a chart of mathematical perfection and generously posted it on his Twitter feed for all to see.
Without getting too wonky, the Fibonacci series of numbers from the world of mathematics describes many natural phenomena from the spiraling of a snail’s shell and how flower petals sit around their center all the way up to how galaxies are built. It makes sense that it would also describe how a purely technical market trades.
The bad news for crypto enthusiasts is that bitcoin broke its Fibonacci arc to the downside. Similar to the break of a major trendline or moving average, it tells us the glory days for bitcoin are over -- at least for a while.
Moving back to my simpler chart projections, the larger December head-and-shoulders pattern on the daily chart targets about $8,760 on the downside. That’s not even close to a 90% crash but we’ll have to see what happens if and when the market gets there.
Further, as with all speculative frenzies, the fall tends to erase the entire speculative run-up. For me, the final phase began in November at about $8,100. Therefore, a good first target zone is in the mid-$8,000s give or take a healthy percentage.
Remarkably, that only takes the market back to late November. While a hefty 50% price retracement, it is not much of a time retracement.
If we consider that the speculative phase started in May at a price of about $1,400, going back to November would only be a one-month pullback in an eight-month rally. The big problem for bitcoin investors is that the downside target could be as low as $1,400 as this whole fever unwinds. In my November column, I suggested $1,200 was the number.
If you think this matches the trajectory of the Dutch Tulip Bulb bubble and crash of 400 years ago, you may be right.
For now, I do not want to tell the market where it needs to go. The signs suggest -- at least for now -- that there is significant downside ahead. However, at the same time, they do not tell us whether it will merely be a correction or the end of bitcoin as we think we know it.
Should the market find its legs soon and climb back above resistance at about $16,000, then all bearish bets have to be taken down. In that case, maybe an upside target of $25,000 would be conservative.

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