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Analysis

Bitcoin is Close to Topping Out in the Short-Term

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Bitcoin is the toast of the town, with prices closing in on the five-figure mark. At current prices, the rally has covered a huge distance in 2017. On January 1 of this year, bitcoin opened trading at $973.37. From there, to today’s intraday highs of $9749, bitcoin has returned an astounding 901.57% for its investors. While the forecasters are quoting huge numbers for the future, we believe that at the current prices, the risk to reward ratio is skewed to the downside in the short-term.

Key observations

  1. Bitcoin’s rally is gaining momentum
  2. Experts are competing against each other in putting a huge target for bitcoin
  3. We believe the current leg is led by the newcomers who are in for a quick buck
  4. Markets are overextended in the short-term and a correction is likely
  5. We expect the next fall to be about 30% from the highs

But, just because an asset class has risen quickly is no sign that it will fall. True. There are a few sentimental factors and a few technical factors that have led us to arrive at our conclusion.

We are not calling an end to the long-term rally

First, let us make it clear that we are not calling an end to the long-term rally yet. Calling a long-term top is a futile exercise, especially for a new technology like blockchain. Many forecasters have bitten the dust in calling a top in Amazon for about two decades. So, we shall not get into that exercise.

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However, we are calling a short-term top in bitcoin.

Sentimental factors

Exuberance is usually the final stage of the rally. Pick up any news on any cryptocurrency website and you will find forecasters dishing out astronomical numbers for bitcoin.

Agreed, there have been many recent developments across the globe that favor the blockchain technology and the existing cryptocurrencies. However, most experts in the field only talk about huge numbers without any caution about the volatility or a possible fall. Investors are being made to believe that the only way for bitcoin is up.

In a recent survey by LendEDU, a marketplace of private loans, bitcoin investors said that they will sell their positions if bitcoin neared $200,000 levels. While anything is possible in the markets, a price point that huge is unlikely to be reached within the next few years.

Such figures and astronomical targets are attracting new investors who are entering into cryptocurrency trading to make a quick buck.

Bitcoin futures trading by CBOE can be both good and bad

While most of the mainstream Wall Street has stayed away from bitcoin, it is unlikely that the introduction of bitcoin futures trading by the CBOE is going to lead to a stampede for initiating long positions.

Contrarily, we believe that few short sellers are likely to enter the fray and test the resolve of the bulls on the upside. At least for the first few days, after bitcoin futures trading starts, we may see an increase in volatility.

If the big players of Wall Street with deep pockets are able to overpower the bulls, then a fall is likely.

The chart structure points to at least a 30% correction

The reasons mentioned above are regarding trader psychology and they are debatable. Most of the die-hard bitcoin supporters are likely to put those to trash.

Hence, we put forth our finding from the charts that suggests a likelihood of a fall.

We have picked up the short-term tops in bitcoin in 2017 for our analysis. We have disregarded the dips that were arrested at the 20-day EMA and we have not considered the dips that happened without a material rally.

We have considered the intraday highs on the day bitcoin topped. For that day, we also took the value of the 50-day simple moving average.

We find that, all the short-term tops in the markets have started when the percentage difference between the price of bitcoin and the 50-day SMA was in the range of 35% to 39%.

The ensuing correction in the first three instances saw a dip of about 40%. The fourth and the most recent correction, however, was shallower at 30%.

Serial

Number

Date Intraday high 50-day SMA Price above 50-day SMA in % Ensuing correction in %
01 January 05, 2017 1175 821.75 35.38 37.47
02 June 12, 2017 2999.99 2014.18 39.32 41.39
03 September 02, 2017 4980 3461.14 35.98 40.26
04 November 08, 2017 7898 5330.04 38.82 30.22
05 November 27, 2017 9749 6694.14 37.15 ?

 

As of November 27, the difference between the intraday high of $9749 and the 50-day SMA value of 6694.14 has already reached 37.15%. This difference is closing in on the higher end of the percentage value, which has led to a correction in the past.

Even if we take the minimum correction following the top, we shall see a 30% correction, which will sink bitcoin to around $7000 levels.

Risks to our assumption

We have assumed that the market participants are in a euphoric state, however, this is difficult to gauge. If the markets are only in the optimism stage of the bull run, it still has a long way to go.

We have taken the performance of bitcoin only in 2017. This is a small sample size. The current rally may just continue higher without giving a meaningful pullback.

Conclusion

While the debate on the valuation is never-ending, we believe that the current pace of ascent is looking euphoric in nature. As the proponents have benefitted by holding through every dip, there is a sense of security among the buyers that no matter what, price of bitcoin can and will only go up.

We believe that even if bitcoin has to rise, it will break this notion and test the long-term investors before embarking on a long-term uptrend. We, therefore, recommend trimming long positions in bitcoin in phases, instead of selling all at once. We expect a short-term top around the $10,000 mark. We believe the investors can buy bitcoin at lower prices in the next few weeks.

Featured image courtesy of Shutterstock.

 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 9 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




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4 Comments

4 Comments

  1. Chris G

    November 27, 2017 at 6:27 pm

    Fantastic article Rakesh, and good call on ETH – I’m largely moved out of BTC and into alt-coins. The main risk for me is correlated correction with bitcoin, so I’m in more of a defensive position atm in terms of protecting profit.

    • Rakesh Upadhyay

      November 28, 2017 at 3:23 am

      Hello Chris,

      Thank you.

      I believe it is a wise decision to be defensive when investors throw caution out of the window. Yes, we may lose a few points, but we shall also lose less when the markets turn down.

      As Jeff Saut of Raymond James says often “There are old traders” and “There are bold traders”, but “There are no old and bold traders”.

      With warm regards
      Rakesh Upadhyay

  2. jf5585

    November 28, 2017 at 1:09 am

    The last 2 times that Bitcoin corrected, wasn’t it to with the China ban and also the fork cancellation? When there are no external influences, it seems nothing seems to stand in it’s way? $10k is a milestone number which may make some people want to sell. But is looking at past corrections (which were down to external influences) to analyse the future that relevant here?

  3. Rakesh Upadhyay

    November 28, 2017 at 3:31 am

    Hello jf5585,

    You have a good point there.

    In my experience, I have found that when the markets are overextended, it latches on to some news and starts a correction and I have found that such occurrences happen at important technical levels.

    Therefore, technical analysts still get a lot of their forecasts correct.

    Hence, I would be careful at $10000.

    Notwithstanding, what you say may also be correct. $10,000 may prove to be a temporary stop after all and I might be proven wrong. Hence, I have suggested booking profits in batches and not at once. If markets continue their upward momentum, we can wait to sell the remaining positions.

    With warm regards
    Rakesh Upadhyay

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Altcoins

Crypto Critics: Fractured Facts

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I have another confession.  As a long time investor, I believed in the theory of efficient markets. This basically means that every participant in the market has immediate and complete access to all information facts like price, earnings and other data.  

I made the mistake in applying this theory to cryptocurrencies. Lately, this has been a mistake.  Yes it is true that anyone with the time and interest can go about gathering all the facts. But are all facts telling the truth or are they really fractured facts?  Either way they are dictating investor thinking and that is a key to this market.

According to reports on MarketWatch, crypto prices slumped on the release of a 24 page report from the Bank of International Settlements. BIS stated that cryptocurrencies suffered from “a range of shortcomings that would prevent cryptocurrencies from ever fulfilling the lofty expectations that prompted an explosion of interest — and investment — in the would-be asset class”.

The BIS is no small town organization. They serve as a central bank for other banks and they have been doing this since 1930.  When the BIS talks, people take things they say very seriously.

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The doomsday article released Sunday paints an accurate picture of the state of cryptocurrencies today. But what about tomorrow?  Most everyone is familiar with the issues of speed, security and energy consumption, not to mention regulation. But for the BIS to conclude that none of this problems will ever be solved is down right nieve.  It is the equivalent of declaring in 2001 that the Internet was doomed because 90% of users were connect on dial up modems.

Rotten Research

The BIS report is not the first fracturing of facts presented by well regarded organizations that is scaring investors. Remember back in May? We were treated to the research headline: Bitcoin Futures Caused The Crypto Market Crash according to Federal Papers.

Both the Federal Reserve Bank of San Francisco and a Stanford University professor released a report concluding the launch of bitcoin futures last December contributed to the ensuing price collapse. Pretty far fetched stuff, and here is why.

Bitcoin futures trading began on December 10. BarChart.com shows the CME traded a measly 932 contracts while the CBOE handled 3,887.  Of that total some 2,828 contracts were still “Open Contracts” on December 29th leaving just 1991 coins to do all the harm. During that final week of December over 1.4 million coins were traded. The findings were simply flawed.

Much like the BIS, when the Federal Reserve speaks, people believe they have done their homework carefully.  Throw in Stanford and that adds further weight to this conclusion.

And Then There Are Those Other Facts

And then there was the revelation last week that, much of bitcoin’s 2017 boom was market manipulation, research says.  In a huge 66 page report it was claimed that at least half of the 2017 rise in bitcoin prices was due to coordinated price manipulation using tether.

The author, University of Texas at Austin finance professor John Griffin, argues that Tether was used to buy bitcoin at key moments when it was declining, which helped “stabilize and manipulate” the cryptocurrency price. BTW: this is the job of the specialist on the floor of the New York Stock Exchange.

Professor Griffin appears to have done an excellent job correlating events without much consideration for the economics involved.  According to Bloomberg’s Aaron Brown, for Professor Griffin to be correct in his assertion that tether pushed up bitcoin prices four basis points per 100 bitcoin, Bitfinex would have needed to spend a boatload to inflate the cryptocurrency.  With Bitcoin at $10,000, for example, that means Bitfinex spends $1 million to push the price up to $10,004.

When you look at things from this perspective, Griffin’s findings look pretty absurd.

Look Closely At The Facts

These days with crypto psychology the worst since Mt. Gox in 2014, it seems like a good time for investors to capitalize on the fractured facts.  Technical analysis shows that cryptocurrencies bitcoin, Ethereum, Ripple and others are hovering around key support levels. It would not be shocking at anytime to find some academic study linking crypto to the common cold.  By the way, it is a fact that last years dramatic crypto price spike came right at the start of the flu season.

A far more relevant fact was last week’s announcement by the Securities and Exchange Commission that neither bitcoin or Ethereum were securities. Perhaps equally important is the conclusion that when ICO do not convey an equity ownership position, they too are considered in the same non-security category as bitcoin and Etherrun.  This is a fact.

What we do know is that crypto prices are as low as they have been since well before the spike last December.  Just as the markets recovered from Mt. Gox, the mindset of investors will recover and that is the key.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.4 stars on average, based on 81 rated postsJames Waggoner is a veteran Wall Street analyst and hedge fund manager who has spent the past few years researching the fintech possibilities of cryptocurrencies. He has a special passion for writing about the future of crypto.




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Analysis

Europe Drags Stocks Lower while Trade War Fears Return

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The risk-off shift of Friday continued today throughout the major financial markets, with the German political standoff on migration weighing on investors sentiment as well, besides the emerging market troubles, and the trade skirmish between the US and China. All of the major US indices opened the week lower, with Europe clearly underperforming and Asian equities also being under pressure.

As Chinese announced retaliatory tariffs are after last week’s US steps the week could bring upon another round of measures by the Trump administration and with that, the escalation of the trade tensions is very much a possibility again.

S&P 500 Futures, 4-Hour Chart Analysis

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Despite today’s losses, the leading indices, especially the Nasdaq and the small-cap Russell 2000, are still just a tad below their all-time highs, while the relatively weak benchmarks are 5-10% below their yearly highs. The balanced S&P 500 is also shy of its all-time, but the short-term uptrend remains intact, and incredibly enough, the benchmark still didn’t leave the range of the early-February crash which unfolded in just 3 days.

Euros Stoxx 50, 4-Hour Chart Analysis

The divergence between the leaders and the rest of the global market, continues to point to the fragility of the rally, and as emerging market currencies are sill clearly in trouble, we don’t expect a broad march to new highs in the coming weeks and we remain defensive towards global risk assets.

Commodities Smacked Lower amid Risk-Off Shift

DXY (Dollar Index), 4-Hour Chart Analysis

Currencies settled down after their crazy central bank loaded week, with the Dollar pulling back slightly off its highs against the Euro and the Yen, while holding its ground compared to the other majors. The Dollar index broke out of the consolidation pattern as we expected and it is now challenging the multi-month highs set in May.

USD/CAD, 4-Hour Chart Analysis

The Dollar is now trading at a 12-month high against the Canadian Dollar, as the pair left behind the 1.30 level as we expected, while the Aussie is also close to hitting levels not seen since last summer, as Friday’s drop in commodities put pressure on the already weak AUD.

WTI Crude Oil, 4-Hour Chart Analysis

Commodity traders are licking their wounds after Friday’s rout, although crude oil staged an impressive rebound off the two-month low hit in early trading below $64 per barrel with regards to the WTI contract.

That said, the short-term trend is clearly negative, and     new lows are likely in the coming days, although the much-awaited OPEC meeting later on this week could cause wild swings in the key commodity, with speculation already being rampant about the possible output change by the cartel.

Featured iamage from Shutterstock

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 276 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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Analysis

Crypto Update: Coins Consolidate Above Support but Downtrend Still Intact

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It has been a very quiet weekend for the major cryptocurrencies so far, as the predominantly bearish week ended with range trading and a collapse in volumes across the board. Most of the top coins failed to gain back the ground they lost during the steep selloff, with only Binance Coin and VeChain showing meaningful bullish momentum.

The relatively strong Ethereum, EOS, and Ripple remained stable, with ETH hovering around the $500 level, EOS trading north of the key $10 support despite the network’s technical issues, and Ripple being stuck in a narrow range just below the widely-watched $0.54 resistance level. The total capitalization of the market has been virtually unchanged at $280 billion, as both Bitcoin and Ethereum flatlined.

BTC/USD, 4-Hour Chart Analysis

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Bitcoin is trading right at the short-term support level near $6500, holding up just above the April low, with the crucial long-term support zone near $5850 that is vital for the whole segment. The coin is clearly in a short-term downtrend, while also being relatively weak on all time frames. The oversold short-term momentum readings are now cleared and that could point to a test of the lows in the coming days.

 

ETH/USD, 4-Hour Chart Analysis

Ethereum also cleared the short-term oversold readings, but it failed to leave the vicinity of the $500 support/resistance level. Despite the coin’s undoubted relative strength, and the still bullish long-term setup, the short-term trend signal remains a sell, and the declining trend is intact. Traders should still not enter new positions here, while investors could add to their holdings on the short-term selloffs. Strong resistance is ahead between $555 and $575, while further support is found at $450, $400, and $380.

Divide Widens between Leaders and Laggards

LTC/USD, 4-Hour Chart Analysis

Although short-term correlations skyrocketed during last week’s decline, the divergence between the relatively strong and weak coins got even more pronounced, with the likes of Litecoin, Dash, and Monero severely lagging the broader market. Litecoin got stuck below the $100 level after the breakdown last week, and it is below the long-term base pattern, as it failed to show relative strength during the weekend. Immediate support is found at $90, but new lows are likely in the coming days, as the short-term downtrend remains dominant. 

BNB/USDT, 4-Hour Chart Analysis

As a positive outlier, Binance Coin remained bullish amid the broad decline, holding on to the relative strength that it has been showing for several weeks. The coin’s stability is encouraging, and it’s nearing its rally highs with today’s surge, while having a good chance of resuming its uptrend, even as another segment-wide selloff could cause a jump in volatility again.

For now, the market is torn between bullish and bearish forces, and investors should focus on the technicals of BTC and ETH, while also keeping an eye on the leaders of the rally for signs of sutained strenght.

Featured image from Shutterstock

Disclaimer:  The analyst owns cryptocurrencies. He holds investment positions in the coins, but doesn’t engage in short-term or day-trading, nor does he hold short positions on any of the coins.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 276 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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