T.A. Lesson Mixed With a Bitcoin Review

$BTC Oct 02, 2020

Let's start by taking a look at Bitcoin on the 2-week resolution (panning really far back here)

See below:

As you can see in the chart above, I have something that's called an, 'overhead downtrend resistance'.

Let's take a second and break thse terms down.

What is Meant By the Diagonal Part

This is honestly pretty intuitive, so I won't insult anyone's intelligence by going too far into this.

However, it should be noted that I am identifying this explicitly because there are other forms of resistance (i.e., horizontal) that are different in the way that their existence is not evidence of a downtrend, whereas the diagonal overhead resistance point is.

Something to Keep in Mind About the Diagonal Overhead Downtrend Resistance

Volume tends to move in the direction of the overhead trend (i.e., if its a diagonal downtrend, the volume, accordingly, moves downward). There should not be divergence here (overall)

The longer that this overhead diagonal resistance is in place, the "stronger" that it is. This is something to account for when considering breakouts (also need to make sure you're careful to not fall into the trap of buying into a 'fakeout')

Analyzing the 'Downtrend' Part

This perhaps is the most important facet of evaluating the chart pattern (in my personal opinion), because my proposed trading strategy and philosophy revolves around the concept of using these determinations as a form of affirmation that stands above all else.

For example:

A) While Bitcoin is in said downtrend (if you're tarding on this resolution specifically), it is unwise to attempt to enter long positions unless one is doing so with the understanding that these positions should be extremely temporary.

B) The reason why I typically advise trading against the trend is because you'll get your ass kicked doing so. Usually the volatility accelerates in the opposite direction of where you need the price to go to gain from your position. Which means that if you're trading against the trend then you're most likely entering into positions with very limited upside with a comparatively high amount of downside risk.

Assessing the Breakout

For Bitcoin, this is of critical importance - because there can be "fakeouts" and they have occurred in the past.

What's a fakeout?

A fakeout is essentially when it appears that the price has broken above a long-term overhead diagonal resistance...only to fall back down beneath it just a short while later.

At the time of writing, Bitcoin has posted what appears to be a definitive breakout:

However, the price has consolidated back down toward the previous overhead diagonal downtrend resistance point to test it as support.

Indications of a Potential Fall Below This Support Point

We should start with some important fundamental considerations, given some recent events in the blockchain space.

Impact of the BitMex Indictment

On October 1st, 2020, the DOJ alongside the CFTC announced mutually exclusive enforcement actions against BitMex exchange.

At the time of the announcement's release, BitMex was shown as being ranked at #2 among all other exchanges in 24H traded volume.

However, it is worth noting that said volume had increased by over 50% overnight...which is a curious jump in volume for a single day.

The obvious implications of their closure on the blockchain space is "bearish" to say the least and the denial of this obvious fact only makes the potential fallout worse.

Global Tensions

Like it or not, we must acknowledge that the Western markets have a significant impact on the price of Bitcoin.

However, this correlation between the traditional legacy markets and Bitcoin's floating exchange rate is one that does not appear to manifest itself unless there is significant volatility in the legacy markets (which we can see now, hence the enhanced correlation).

This is a bit of an ominous fact when considering that:

A) The Democrats and Republicans (two major political parties in the United States) have failed to agree on legislation that would result in millions of U.S. citizens receiving a check from the government to further stimulate the economy. To be clear, the idea that there should be a stimulus package of some sort crafted is not where the point of contention lies at for either side but rather how the money should be spent. So things are obviously not exactly great from an economic standpoint (no matter what is said by external parties). Also, as far as Wall St. is concerned, this is bad news bears for them, and we care how they perceive these events, because that helps one to gauge what the potential market reaction will be.

B) As many know, the president of the United States announced that he and wish life had fallen ill with COVID19 very early on October 2nd, 2020 (just before 1:00 a.m. from his Twitter account). The market reaction was visceral (an immediate -400 point drop in the Dow Futures as this news traveled).

There has been a temporary mitigation in the meantime, prompted by statements from Congressmen (particularly the House Speaker, Nancy Pelosi, that have suggested that the 'situation' with President Trump has now made a deal more tenable than it was in the past - which is a curious statement to make).

However, should that deal not come to pass (which is looking increasingly likely as the year rolls on), the impact on the stock market will be felt.

Also, if the worst case scenario does occur and Trump passes, that will also be devastating to the markets as well (by 'worst case', I'm looking at this in a completely amoral & apolitical manner, do not read into my statements as an affirmation / disapproval of the president of the United States or any of its members of government /// None of that matters within the context of fulfilling my duties in the blockchain space)

Now that we have all of that defined, let's take a step back and look at bull traps.

Defining Bull Traps

Per Investopedia:


What was described above in terms of the price potentially rising above the overhead diagonal downtrend resistance, mimicking a "breakout", only to be followed by losses is an outcome that every prays they can avoid.

And while there is no prediction when it comes to the markets, one should at least appeal to other indicators to get a sense for whether it is reasonable to expect a continued appreciation / depreciation for the asset in question being examined (in this case, Bitcoin)

We'll be doing some of that later, but for now, I'm going to conclude this 'lesson' as I think the main points have been drilled home, which are mainly:

  • Assess the overall direction of the trend and try not to trade against that at all costs.
  • Diagonal resistance and support can be one of the most reliable ways of deducing the overall trend of the underlying asset (again, in this case - we're referring to Bitcoin here)

[1]: https://www.investopedia.com/terms/b/bulltrap.asp




Great! You've successfully subscribed.
Great! Next, complete checkout for full access.
Welcome back! You've successfully signed in.