Monday, 11 November 2013

BTC Update Monday 11th November - We're Back!

Hello Peeps!

Well, the App is 99% done and we can finally switch focus back to the content. Hurrah!

And we rejoin the fray at an interesting time. As you're all well aware, the market has been in rocket ship mode for the last few weeks, blowing through it's previous high of $260 and trading as high as $390 on Mt Gox.  But as you are also aware, when momentum finally waned on Friday, the order flow reversed violently and we quickly gave back almost 50% of the most recent upswing.

Lets have a look at this on a chart:

A counter-move of this magnitude is never comfortable, especially when it happens so quickly, but we must try to bear in mind that Bitcoin is a very young and relatively illiquid market.  It does not have the derivative instruments like futures exchanges that more sophisticated markets consciously developed early in their respective evolution with the stated aim of attenuating precisely the sort of volatility that currently afflicts bitcoin.  But these derivative markets are coming; the Bitcoin Investment Trust is the first example and as others join, the weight of institutional money will serve to moderate the violence of these swings.  Indeed, after a move of the magnitude that we have witnessed in Bitcoin, a 50% retracement is not unusual.  As market technicians of old are fond of saying, 'markets go up a stairway and fall off a cliff'.

Anyway, that's enough ruminating. Let's get into the detail.

As you can see from the chart, when Bitcoin fell off it's cliff, it's descent was halted by horizontal support, co-incident with the its former trend channel line (shown in purple).  This was simply the point when sufficient buy orders were 'in' or placed to reverse the order flow.  And it shouldn't surprise us that this was the case as a confluence of technical support is always more likely to reverse order flow than just one.

Now to understand the price action since we need to descend to a lower time-frame chart.  This is the 1hour (every bar is represents one hour of price action):

Now I want to draw your attention to the following:

1. As I've indicated with the two red ellipses, the market has  actually tested support @ $290 not once but twice, and it's been rejected on both occasions.  This is a pretty bullish indicator.

2. Having said this each successive rally is currently petering out at a lower point in price than its successor. This is less good news for the bulls.

For the time being this leaves us in uncertain territory but there are conclusions we can draw.

Firstly, we can say that if the market manages to hold above and then break away from $340 (where it currently hovers), next resistance at $365 is 'on' and if we can blow through this level on momentum we'll have another run at the tops.

On the other hand, if momentum turns negative to the extent that the market trades down through the lows at $290, the most probable outcome would be a retest of support at $265, and since it marks the previous high and is coincident with sloping channel support (lower purple line) this would be a natural target for counter-trend traders.  When you couple this fact with the 3 factor support in this zone that I have just underlined,  you start to see why the market might both get here and turn from here.

So, given this analysis, what is a guy or gal to do?  Well, the first point I would make that the market is currently in no man's land and it makes little sense to pile in at the current level as in the short term we could well go either way.  If, on the other hand you need to convert back to fiat in the short term it makes a lot of sense to hop off or lighten up your bitcoin right about here for exactly the same reason; the market could go either way.

But, investors should sit tight and watch $290 closely.  If we probe this area again and reverse, hopping back on or adding on to an existing position would represent a nice wholesale purchase price.

And it we get back down anywhere near $260, wild horses won't keep us from getting even longer than we already are, as it represents an absolute bargain within the current context of Bitcoin's strong up-trend.

Remember, in this blog we try to ignore the fundamentals and trade only we see on the chart before us. And right now these are the levels we are watching; $290 and $260.  Otherwise we'll be sitting on our hands.

'Hope this helps.  We'll keep the situation under review regularly from here - promise...

Rob @ BitScan