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Chart Of The Day: Bitcoin's Downtrend To Continue?

Published 08/22/2022, 08:12 AM
Updated 07/09/2023, 06:31 AM

Bitcoin may have started another leg down in its long-term downtrend, with the initial target of $17,611.

Crypto experts are surprised at the recent 'sudden' 10.4% drop and can find no catalyst for such drastic moves. However, the trigger is probably the most talked about market theme—the alleged US Federal Reserve pivot.

We are in a bear market because the highest US inflation in more than 40 years has forced the Fed to reverse its position that inflation was transient and will ease right after lockdowns.

The FOMC minutes show that the US central bank Fed went from the most accommodative policy on record to the fastest tightening since the early 1980s.

However, on June 21, after the ugliest week for US markets since the March 2020 crash, the S&P 500 jumped for no reason other than a dead cat bounce and that bargain hunting spread to Bitcoin.

Then, better-than-expected US corporate earnings supported risk, and the confirmation bias of diehard bulls that inflation and rising US interest rates were peaking helped.

However, now bulls are losing their cool ahead of what is now expected to be a hawkish Fed symposium at Jackson Hole this week, after Fed members reiterated that interest rates are on an upward trajectory.

Investors had convinced themselves that if a Fed member was willing to utter that interests could go down when inflation fell, it meant that the central bank had pivoted.

Bulls also boasted that the Fed said it is now data-dependent. They took that to mean that the Fed would not automatically hike rates—as if that's what they've been doing until now—but would need to be convinced by data in order to do so.

I argued the opposite.

As a result crypto investors were stunned by the plunge in stock markets and the leading cryptocurrency on Friday. But Bitcoin may have also sparked a selloff for technical reasons.

 Bitcoin Daily

The leading digital currency fell through the bottom of a rising wedge. This structure is a triangular pattern with both lines climbing. The catch is that the lower bound rises faster than its upper counterpart.

Given that the lower line represents buying and the upper selling, it is evident that buyers are more convinced than sellers that prices should rise. However, when time after time, buyers are proven wrong, as sellers are not willing to let prices rise proportionate to the buyers' line, bulls become disheartened.

The last straw is when the price doesn't just languish but falls through the buyers' line. At this point, bulls are likely to cut their losses, encouraging sellers to push further. Moreover, some bulls may convert to bears, adding downward pressure. Finally, those sitting on the fence recognize a significant move and throw their weight into the fight.

Both the MACD—a price-based, lagging indicator—and the ROC—a momentum-based, leading indicator—provided bearish crosses.

A note of caution. Conservative technicians may include the price action of July 12 and 13 when Bitcoin fell. We draw the (dotted) line accordingly and realize it has supported Friday's plunge. That means that some people are probably trading according to that interpretation, which may not be a wedge but a short-term rising channel.

Nevertheless, even according to that version, the price may rise again but will likely meet overwhelming pressure at the top of the long-term falling channel. Even if I'm right, and this is a rising wedge, as I've drawn it, the price can still trigger a return move, which could be indiscernible to a rally within a rising channel. Therefore, money management is essential.

Implied Target: The initial implied target is the bottom of the pattern at $17,611. However, I expect Bitcoin to fall further. First, after the price found resistance by the 100 DMA, Friday's fall cut through the 50 DMA. There are more compelling reasons for an ongoing downtrend.

Bitcoin Weekly

The biggest cryptocurrency's selloff on Friday also pushed the price below the 200-week MA for the second time since June 13. The last time BTC fell below the biggest MA was in the March 2020 market crash. (Bitcoin rose right after that from the depths of $5,000 to $65,000. However, that was when the Fed was loosening policy, now it's tightening.)

Crypto enthusiasts were excited about the recent 40% rally within the wedge, but I've been saying for a while that as long as it's in the downtrend, it's nothing more than a corrective rally.

BTC climbed 46% between January and March, but that was nothing more than a return move after completing an H&S top. Since then, trading created an even larger double top, whose size implies a target that is greater than the crypto's worth.

For now, I'll aim for the $12,000 levels, a previous resistance. Dip buyers may buy at that level, remembering the 400% explosion.

Trading Strategies

Conservative traders will likely wait for the conservative interpretation, including all the pricing of the congested rally since mid-June, to play out against the long-term falling channel.

Moderate traders would at least wait for the price to confirm the wedge's integrity.

Aggressive traders may enter a long contrarian position, counting on the confirmed support of the trendline that includes all the pricing in the range to set off a return move.

Trade Plan: Aggressive Long Position

  • Entry: $20,910
  • Stop-Loss: $20,770
  • Risk: $140
  • Target: $22,310
  • Reward: $1,400
  • Risk-Reward Ratio: 1:10

Disclaimer: The author currently does not own any of the securities mentioned in this article.

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