As we all know, Bitcoin has taken a hit from the China crackdown on cryptocurrencies and the numerous bank executives coming out against Bitcoin. However, as eluded to in my previous article, there are just as many banks investing in blockchain technology giving credence to Bitcoin and other cryptocurrencies.
For all the negative news, Bitcoin remains in its bullish channel and as long as it remains in the channel, BTC is more likely to go higher than lower.
However, if the fundamentals turn negative for cryptos and blockchain technology, BTC and others will likely resume their corrective moves. In my opinion, as long banks and in some cases, governments continue investing in blockchain technology, it bodes well for all cryptocurrencies and especially the market leader that is Bitcoin.
Further investment will also bode well for those investing in the Bitcoin Investment Trust (OTCQX:GBTC) or following the on-going developments if the first Bitcoin ETF through the Winklevoss Bitcoin Trust ETF (COIN).
The bullish channel remains intact
- On the chart below, the pink line connects the tops in the BTC rally. The market tends to trade in angles, whether it be an up move or a down move, the angles typically remain consistent. As a result, I cloned the top pink trend line to create the green mid-point line and the blue bottom trend line. And as you can see, they line up quite nicely with price action. I believe the reason for the consistency is that investors trade these channels, by placing buy and sell orders at various locations in the channel, thus keeping the channel’s form intact.
- Despite the corrective move in BTC, the crypto has bounced off the channel bottom and is currently heading higher. One could argue that this correction was needed to show the strength of the uptrend. Although painful it might be for longs, a healthy correction is needed sometimes for the long-term health of the uptrend. For example, a break back above the midpoint would likely lead to aggressive buying, sending BTC to a new high. And without the correction, you wouldn’t have the new traders who missed out on the previous rally, who might jump at the second chance to get in the market.
Two Bullish breaks:
On the chart below we see two significant bullish breaks.
- The first bullish break is the price break of the orange trend line (connecting the lows of the correction). This break is significant since it deflates the bearish momentum that was prevalent in the market. In other words, traders will be less inclined to short BTC while it trades on the bullish side of the orange trend line. And to put it simply, there’ll be more buyers than sellers in the market now that BTC has broken the trend line connecting the highs of the downtrend.
- The second bullish break is the break of the trend line on the RSI momentum indicator. The dark red line connects the highs in RSI’s momentum during Bitcoin’s correction. Although it may appear obvious that an indicator would follow price action with a trend line break, they don’t always move in tandem. Sometimes divergence occurs, meaning the indicator goes in one direction while price action goes in the opposite direction. The fact that RSI is moving higher in tandem with BTC’s price action shows there’s momentum behind the current move.
- Of course, the trend line breaks don’t necessarily mean that BTC can’t correct lower. However, unless there are significant negative fundamentals behind another move down, those bearish moves will have less momentum behind them. The probabilities favor a higher BTC versus a lower as long as it trades on the top of the orange trend line and RSI trades on the bullish side of its red trend line (yellow circles).
Key levels to watch:
If you follow my articles on SeekingAlpha.com, you know that I believe the fundamentals drive stocks, but the charts show the path or course of direction. Traders place buy and sell orders around trend lines to either go long or short or to trigger a stop-loss order or take-profit order.
On the chart below we can see some of the key levels in price or where traders may have buy and sell orders placed for Bitcoin.
- On a bullish break of $4150, there’s likely to be buy orders in that area, and BTC may try to retest the $4300 to $4400 area.
- The $4250 to $4300 area may have some resistance associated with it, as traders might take profits. The completion of two equal waves is a common area for taking profit orders to be located. The break through the trend line was the 1st 11% move and we’re currently in the second 11% move higher, which would finish at $4300.
- If BTC hits $4300, watch for a pullback to the 38% or 50% retracement of the current move higher. This is normal in an uptrend and might send BTC back down to $4000 before bouncing and retesting the mid-point of the channel (green line) or $4500 to $4600.
- A bearish break of $3600, would put BTC back into the downtrend and on the bearish side of the trend lines as indicated by the yellow circle. This would obviously be a bearish signal and would likely lead to a retest of $3500.
- A break of $3500 would be very bearish and would likely lead to investors unwinding long positions and waiting for positive fundamental developments to resurface. Look for a move back to $3200 and possibly $3000 if you see a daily close in Bitcoin below $3500.
- Remember a break of the orange trend line is only significant because bearish, short traders have not allowed it to break since the correction began. Allowing it break now means those same bearish traders are on the sidelines.
- Why these key levels are important: If bearish traders unwind short positions at these levels while bullish traders are simultaneously entering long positions, we’ll have a scenario where both long and short traders are buying, thus exacerbating the moves higher.
- As long as the channel remains intact, Bitcoin is poised to make another run higher.
- Watch for any further developments out of China on whether they reinstitute Bitcoin and other cryptos or if other governments follow suit in banning Bitcoin.
- From a risk management standpoint, if we see more exchanges pulling out of Bitcoin and blockchain technology as a whole, BTC is at risk for a corrective move lower. Stop losses can help, but if the market blows through your stop, your order isn’t going to be filled until the market stops moving, which could be well below your original stop level. If you want evidence of this phenomenon, look to the move in Euro-Swiss franc move following the decision by the Swiss National Bank to remove its currency peg against the euro, surprising the market. Brokerage accounts were wiped out in minutes. If a massive devaluation can happen with currencies backed by central banks, it can happen to Bitcoin.
However, I believe it’s still to be determined as to the fate of Bitcoin and other cryptocurrencies. For the time being, the cash is still flowing into blockchain technologies and cryptocurrencies and as long as that continues, the bull run in Bitcoin should continue.
Good luck out there.
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