This article was published in Business Times’ column “Chart Point” on 29 January 2018.
Bitcoin daily Chart Source: Bloomberg, PSR
*black line = 10 day exponential moving average
Bitcoin first began trading in 2010 and have since experienced many episodes of wild swings to the downside. Crashes of up to 50% were a norm in the early days of bitcoin, but all the early moves are almost negligible compared to the current price of bitcoin. The idea of this cryptocurrency seemed to be catching on to the crowd as it survived through multiple crashes.
Each asset class behaves differently to different indicators and parameters. Our study has shown that the 100-day exponential moving average appears to be the dividing line between the long-term bulls and the long-term bears. The general rule of thumb at least for bitcoin is if the price is above the 100-day moving average, then the uptrend is deeply entrenched, vice versa. The 100-day moving average is a critical area to watch as it has been the backbone that kept the uptrend intact since June 2015. As long as it holds, the general uptrend should remain healthy.
In total, there were six various occasions where the 100-day moving average successfully reversed the sharp sell-off since 2015 shown by the highlighted areas, proving the importance of the 100-day moving average. Every rebound off the 100-day moving average propelled price into new record highs. The current price action around the 100-day moving average will be pivotal for deciding if the long-term uptrend remains intact or not.
By calculating the major corrections that happened after Bitcoin trended higher consistently suggests a high likelihood of a reversal back to the uptrend soon. For this study, we only used the data after 2015 by combining the 100-day moving average signal. Since June 2015, after Bitcoin closed above the 100-day moving average, a bottom was gradually established. Bitcoin started breaking higher above the $300 range. It was around that timeframe when the euphoric bulls rushed in and created the parabolic move higher. Bitcoin rose from a low base of $210 to a high of $1950 over two years. During this strong bullish phase, Bitcoin experienced ten major corrections of up to -21% and the largest drawdown was -40% in November 2015. On average, the correction was around -33% before the relentless buyers re-emerge.
Coincidentally, after the futures market went live in December 2017, Bitcoin formed a top at a record high of $19,500 and subsequently nosedived. Part of the reason for the sharp selloff is the ability to short bitcoin in the Futures market where it was unavailable previously.
The current correction of -53% that we are witnessing has already surpassed both the average correction of -33% and the largest drawdown of -40% in November 2015. This might not come as a surprise considering how fast Bitcoin has rallied over the past one year. As the bullish moves go parabolic, a deeper and larger correction is unavoidable.
Therefore, with the current correction overstretching to the extreme, a reversal higher should be expected where the mean reversion occurs. Moreover, with Bitcoin testing the crucial 100-day moving average, this makes a resumption of the long-term uptrend much likelier. Bitcoin is also currently sitting at a confluence of support at the $10,000 psychological round number, long-term 50% Fibonacci retracement level from August 2015 base which should continue to keep the uptrend intact.
From the price action perspective, the bullish reversal hammer on 17 January 2018 could very well be the next higher low (HL) point within this uptrend. The current setup is still a bullish bias. Target wise, expect Bitcoin to reverse back into the prior uptrend to retest the $16,500 resistance area followed by $20,000 psychological round number.