Technical Update – 4-6-18

The market has been down the last few weeks but that doesn’t mean that opportunites don’t exist. Using some technical analysis on Bitcoin we can form some conclusions on where the best opportunities lie.

In this post I have used cryptowat.ch for charting and GDAX for the market depth charts.

Why Is The Market So Down?

The markets have been very rough lately. Since my last post Bitcoin has fallen from $8,500 to $6,600, slightly more than 20% in two weeks. The rest of the market has experienced similar losses, with some coins down even more than Bitcoin.

In my opinion, the main catalyst for this sharp sell off with few rebounds has been approaching tax deadline. In the United States taxes are due on April 17th which is about a week away. People who have made significant realized profits in 2017 have very large tax bills. They are being forced to sell at any price they can get so they have the cash available by the tax deadline. Less money circulating in cryptocurrency exchanges is enough to cause prices to go down.

Some Other Reasons

There are a few other factors depressing the markets. More people have begun short selling to make money as the price of Bitcoin drops. Short selling is when somebody borrows someone else’s coin and sells it on the market with the hope of being able to buy it back cheaper before they return it. If the price falls, the short seller keeps the difference as their profit. It is very tempting when the price continues to fall day after day.

Another factor is that a lot of the hype in November/December has worn off. People are realizing that some of the ICOs they have invested in are not as promising as they were led to believe. Or they might be realizing that the development is going to take longer than initially expected. These factors combined with lower prices is making many people who bought in over the last few months question their decision to invest in the first place.

What Do The Charts Say?

The chart below shows some recent price action on a six-hour chart (each candlestick represents the price action over a six-hour period). Notice the downtrend line that began around March 24th and extended through April 1st. This was a strong downtrend from $9,000 to $6,400. I would expect a strong rebound once the sellers let off, but the rebound was short lived, and the price fell back below $7,000 after just a couple days. Still, this was probably the best opportunity to profit in the last two weeks.

BTC 6 Hour Chart

Now let’s zoom out and look at a 3-day chart. On this chart, there is a clear downtrend line beginning at the record high around $20,000. $6,000 is a clear price point to watch as it was the low back in February. A breakdown below $6,000 could cause quite a bit of panic, ultimately sending the price below $5,000. However, if the price can hold above $6,000 and break out above this downtrend line on the 3-day chart, this will be a very bullish indicator. In this optimal scenario I am still expecting bullish momentum to grow slowly.

BTC 3 Day Chart

Expect more consolidation in the short term. Buyers need to become more confident that the price will not dip any further. This is a hard thing to ask when it seems like every rally is immediately sold into, but the price drops have been relatively small lately. To me, it seems like a lot of traders are confused (more so than usual!). They are flip flopping back and forth between expecting the market to go down and expecting the market to go up.

It is forcing people to look longer term and either stay on the sidelines in cash or stay in crypto and ignore the day to day movements. There is a significant amount of cash on the sidelines from traders who want to be sure the price is moving up before buying back in. Hopefully the market can finish consolidating somewhere above $6,000 and then a lot of this money will find it’s way back into the market, giving us a rally of 30% or more.

Understanding Market Depth Charts

To see the money sitting on the sidelines all we need to do is look at a couple of market depth charts on GDAX. The first graph is for Bitcoin and the second graph is for Ether. The green colored side represents the buyers and the red colored side represents the sellers. Notice how the red side seems very thin compared to the green side, especially for Ether.

BTC Market Depth

ETH Market Depth

This is usually an indicator that the price can move up rapidly when buying pressure returns. When looking at depth charts always be mindful of “fake walls”. A “wall” is any large order that seems insurmountable, such as someone placing an order to sell 1,000 Bitcoins.

Knowing that traders watch the depth charts, some people will place huge orders in attempt to scare the market in one direction or the other. When somebody tries buying into/selling into the wall, however, the order is cancelled. This practice is known as spoofing, and although illegal in most markets, is used quite a bit in cryptocurrency trading. From the depth charts I posted here, there may be a few of these fake sell walls in the $6,800 – $7,000 range on Bitcoin.

 

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