14 July 2019

Bitcoin – ABC-Correction or do we see new Highs?

1. Review

Since the low on December 15, 2018 at $3,127, Bitcoin has managed a spectacular recovery after initial difficulties in recent months. With a high of $13,887 reached on June 26, 2019, the most important and largest crypto currency has more than quadrupled in six months!

In the last two and a half weeks, it has pulled back sharply to $9,620 before increasing to $13,195 US dollars, but so far the June high has not been exceeded.

2. Chart Analysis Bitcoin in US-Dollars

Bitcoin Technical Analysis

Source: Tradingview

On the weekly chart, the wild ride of Bitcoin is clearly visible. Although the moves are huge in both directions, from a long term perspective Bitcoin has so far progressed steadily upwards.

With the recent price spike to $13,887, just over 61.8% of the previous downswing has been recovered. At the same time, it has created a natural resistance zone where savvy investors have taken profits and initially reduced their long positions.

In the big picture, the sharp recovery in recent months is without question bullish. If the high of $13,887 is exceeded, then $15,000 and then the all-time high of $20,000 are realistic and may be achievable this year.

On the other hand, if the sell-signal on the Stochastic Oscillator breaks down, a longer sideways consolidation or a sharp setback in the direction of $7,000 - $8,000 could be expected. The weekly chart is without question overbought and actually needs to cool down. Above $6,000 US dollars and especially above $9,000 US dollars, the bulls remain in control.

 Bitcoin Technical Analysis Chart2

Quelle: Tradingview

On the daily chart, the multi-month upward movement has recently faltered. Since peaking at $13,887 two and a half weeks ago, Bitcoin is correcting from the sharp rise, though it is still unclear whether the $9,620 low is the true low of that correction. It could also be an ABC correction due to the three-part recovery wave to $13,195 and the subsequent sharp sell off. In this case, points A and B would now need to be defined. The final low at C could then only be found in the area of ​​the support zone between $8,800 and $9,200. Alternatively, the lower Bollinger Band ($10,250) could also be a target area and stopped the bears already.

After the clear sell-signal two and a half weeks ago, the stochastic oscillator now moves to neutral and currently does not provide a clear statement. The lower price high ($13,195) is confirmed by the oscillator values.

Really unfavorable is the large gap to the 200-day moving average ($5,820 US dollars). Although this is rising steeply, but runs miles below the current price action. Although much is happening faster in the crypto world, the laws of gravity apply. In this respect, the great distance already warns us to be careful.

Overall, the short term picture in Bitcoin warns of a correction. Of course, an increase of "only" $2,000 would immediately change the situation back to super bullish. So far, however, the completed pattern weighs heavily. The continuation of the upward movement could therefore be delayed significantly. A decline to $9,000 US dollars and in an extreme case even $7,000 US dollars should be taken into account.

3. Derivatives Market Structure Bitcoin

Bitcoin COT Report

Bitcoin has also been traded on the futures markets since December 2017. The all-time high of $20,000 came on just the first trading day of the futures contract!

In general, large players in particular use the futures markets for their speculation. On the gold and silver futures market, the game between the commercial traders (banks, producers, smart money) and the big trend following speculators (hedge funds, etc.) is well known. For the Bitcoin market, however, only a few data series are available for analysis.

It is noticeable that especially the small speculators (the smaller private traders) have been expanding their long positions since the spring of this year, while the big hedge funds speculators have taken the other side. The commercial traders are so far not particularly active on the bitcoin derivatives market, since there are not as many products and thus positions that they would have to hedge via the derivatives market.

From an analytical point of view perfectly positioned for the Bitcoin rally, however, was the group of "Other Reportables", which is not listed individually in the normal COT report. This group was positioned very long at the beginning of the April rally and has moved massively short over the last few months. If this group is right, Bitcoin in the coming weeks and months could go through a deeper correction. 

4. Sentiment Bitcoin

Bitcoin Fear and Greed

Source: Crypto Fear & Greed Index

Bitcoin Fear and Greed Index

Source: Crypto Fear & Greed Index

The last extreme point in sentiment was measured over seven months ago. At that time, the mood was miserable after the price of a Bitcoin fell from almost $20,000 to $3,125 in 12 months and had plummeted into the abyss. Bullish market participants pretty much vanished. This sentiment level was the ideal starting point for a strong recovery.

Currently, bitcoin has gained much more attention due to the almost parabolic increase in June and the topic is increasingly entering the mainstream. As a result, the number of news stories reporting the steep rise is increasing significantly. Likewise, the number of Twitter messages has also increased significantly. This naturally attracts the interest of inexperienced investors. This drives the concern to miss the next big climb. This group of "greenhorns" usually enters near important high points.

However, with Bitcoin recently reaching the high of $13,880 the euphoria is nowhere near where it was in December 2017 at the peak. Greed driven by greed is not (yet) detectable. At the same time, the current mood is certainly too optimistic. The setup feels more like an intermediate high.

Interestingly enough, the fall in the Fear & Greed Index has dropped significantly from $13,887 to $9,620 so that the downside risk should remain limited, despite the typical bitcoin volatility. If the recently high of $13,800 can be overcome, Bitcoin could again start into the next crazy bubble once again. While another sharp price increase is possible, such an increase will be punished again with a bitter correction. 

5. Bitcoin Seasonal Pattern

Bitcoin Seasonality

Source: Seasonax

Even though the evaluation period for Bitcoin is relatively short at only 10 years, the picture is relatively clear as far as the typical seasonal price trend is concerned. Due to the exorbitantly large price swings, however, this pattern can change significantly within one year.

In the current year, Bitcoin has so far modeled the seasonal cycle. Accordingly, the recent top at $13,887 US dollars would now be followed by a downward wave reaching into October. The 4th quarter should then bring a renewed upward movement and higher prices with it.

6. Bitcoin vs Gold

Currently, a Bitcoin costs more than 8.3 ounces of gold. In a long-term comparison, the ratio is approaching the highs of the 4th quarter in 2017. Conversely, one ounce of gold currently costs "only" 0.12 Bitcoin! 

The favorable gold valuation in Bitcoin currently speaks for an exchange of Bictoins into gold. Of course, you should be invested in both asset classes. Bitcoin is currently overvalued, while the price of gold is likely to have more potential, especially as a result of the successful breakout of a six-year downtrend!


Bitcoin in Gold

Source: XE 

7. Conclusion and Recommendation

After a strong recovery rally, there are increasing signs that Bitcoin needs a breather first. Basically, Bitcoin could continue its high-altitude flight at any time due to its "wild and free nature" as well as the already clearly cooled sentiment.

However, at least from the short-term perspective, it is very difficult to come up with a decent risk/reward ratio at current price levels. As well, commitment of trades and the weekly chart together with the seasonal cycle point towards a correction.

Investors should therefore be patient and only use the next major setback in the range of $7,000 to $9,000 for investments and long trades.

Anyone who wants to diversify some of their significantly higher Bitcoins will certainly not make a mistake with a swap into physical gold at the current price of 0.12 BTC for a troy ounce of gold!

Florian Grummes

Precious Metals & Cryptocurrency Expert

www.midastouch-consulting.com

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