Bitcoin’s Rally Looks Sustainable – A Technical Analysis

In this article, the author explains why he has been buying bitcoin and other cryptocurrencies over the past two weeks. This article focuses on bitcoin technical analysis, which points to a favorable setup. Since BTC is the largest cryptocurrency and others are often highly correlated with it, the author has been buying Ethereum as well. 

Bitcoin sentiment is rapidly turning positive. For one thing, mainstream media headlines covering bitcoin has changed from talks of “meltdown” to “Bitcoin broke through $11,000 for the first time since January” (CNBC). The big question now is if bitcoin has already found a bottom and is now set up for a sustained rally. Judging from our technical analysis, we believe this is the case.

Back in January, we wrote an article titled Bitcoin Meltdown: Its Worse Than you Think.  In that article, we warned that, at the time, a 42% pullback from its all-time-high couldn’t even be considered a bitcoin bear market since, 54% of the time, bitcoin trades 40% or lower vs. its all-time-high. We looked at historical drawdowns and warned that it could get a lot worse before things got better.

As we all know, bitcoin’s sell off continued from the time of our article, dropping a whopping 61% from January 26th (the publication date) through February 5th, when bitcoin finally found a bottom at $6,955 (closing price). At that price, bitcoin was 64.3% lower vs. its all-time-high. While are no standards for defining a bitcoin bear market, we believe this recent sell off certainly qualifies. Using data going back to 2012, only 22% of BTC’s trading days were spent trading lower than 64.3% pullback from its previous all-time-high, and most of those dark days were in 2015.

Bitcoin coin

To visualize how bad the recent sell off was, look at the below chart:

As of February 18th, BTC is trading at 45.9% below its all-time high, putting it back within its “normal trading range” as 46% of all trading days were spent below that level (i.e. in 46 out of 100 trading days, BTC traded at or below a 46% pull back from its previous all-time-high).

In addition, we noticed something very interesting in early February: BTC broke below its 200-day moving average on February 5th, and rather than a rapid deterioration in price as we saw when BTC broke through its 50-day moving average in January, BTC rallied 11.5% the following day, pulled back only 1.7% on the second day, and has been trending up since.

Although there are no laws of nature stating that any of these arbitrary moving averages are meaningful, experienced traders know that the 50 and 200 day moving averages are widely used by others, and thus are imbued with psychological significance. When it comes to highly speculative assets with little intrinsic value like BTC, in our experience, market psychology is of paramount importance.

In other words, we believe the key takeaway from our analysis is that the 200-day moving average has served as a support level rather than a resistance level. To see why this is important, let’s go back to the 2014 through 2015 period.

Back in 2014, BTC first crossed below its 200-day moving average on March 27th and stayed below the 200-day for 67 consecutive days. On June 2nd, 2014, BTC crossed above the 200-day moving average but was unable to pull ahead as BTC fluctuated around the 200-day over the subsequent week. This is in stark contrast with what we saw this time around, as BTC is currently trading at a solid 26% above its 200-day moving average (closing price as of 2/18/2018). Even without the benefit of hindsight, it was clear that the 200-day moving average has become a resistance level. The rest is history as BTC spent over a year before it would test the 200-day moving average resistance level once again.

From a technical analysis perspective, we don’t see many parallels between the 2017-2018 period off vs. the 2013-2015 period. But we do see many parallels with the 2013 period.

Back in early 2013, Bitcoin was in the middle of a massive rally as BTC rose parabolically. On April 9th, 2013, BTC closed at a new record of $230 per BTC, before experiencing a bear market. In fact, in 20 out of the 30 trading days, from March 11th through April 9th, BTC set a new all-time-high. This closely parallels BTC’s November through December 2017 rally, when BTC new all-time-high prices 18 out of 30 days during its rally.

We won’t go through every detail of what happened subsequently in 2013, but one key point was that BTC didn’t test its 200-day moving average until July 5th, when it crossed below the 200-day. Then BTC rallied for 8 consecutive days and wouldn’t test the 200-day moving average until March 2014, as discussed previously.

BTC would end up testing and crossing above its 50-day moving average on July 25th, 2013, at $96.90 per BTC, and proceeded to rally 33% over the subsequent 60 trading days. We believe this is important to note since, currently, BTC is still trading at below its 50-day moving average. But at only 9.1% below its 50-day moving average, we believe this level will be tested very soon, which could be a catalyst for further price appreciation.

Since 2012, BTC’s median return in any 60 days out is 16%. We’ve observed that some of the strongest 60-day returns occurred after BTC crossing above its 50-day moving average. For example:

9/27/2017: after 7 trading days below, BTC crossed the 50-day and rallied 109% in the subsequent 60 day period.
7/20/2017: after 11 trading days below, BTC cross the 50-day and rallied 27% in the subsequent 60 day period.
4/3/2017: after 12 trading days below, BTC cross the 50-day and rallied 111% in the subsequent 60 day period.
1/17/2017: after 6 trading days below, BTC cross the 50-day and rallied 21% in the subsequent 60 day period.
9/4/2016: after 41 trading days below, BTC cross the 50-day and rallied 22% in the subsequent 60 day period.

In conclusion, we believe that the technical set up for bitcoin looks very favorable here. In our analysis, the current set up has many more parallels with 2013 than 2014. We are encouraged by the fact that BTC found support in its 200-day trading average and see the potential to test and cross above its 50-day moving average as an upcoming catalyst for further price appreciation. However, while this article focuses on technical analysis, investors should be keen observers of fundamental developments. A major hack or unexpected regulatory headwind could quickly change the trading dynamics. We will do our best to keep our readers informed.

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