Bitcoin Analysis: Week of Sep 21 (Wealth Management Pt. I)

Last Week’s Review

In last week’s post we concluded with the following statement:

“Our overall stance remains the same as last week: Long-Term (tentatively) Bullish, Intermediate-Term Bearish, and Short-Term Bearish. We are still keeping our eye on that possible Double Bottom target in the US$440-450 zone. Last Week’s fall into the Mid US$450’s was close to our target, but the action needs to prove to us that this slightly ‘higher’ low is here to stay. Unless that happens we will continue to treat the constant formation of ‘lower’ highs as an indication that prices have some more room to correct as guessing the bottom is not a strategy.

We will also remain diligent of the following situations:

Bearish: If our current support line of US$440 cannot hold the price up, the next logical line of support is all the way down in the US$360-380 zone.

Bullish: US$500 is now the first line of major resistance and if we can break it to the upside it will also break the cycle of lower highs we’ve been seeing on a weekly basis making the move even more relevant to the possibility of a trend change.

It pretty much happened as expected.  Price dropped down to US$442, stopped there for about a day, then after breaking US$440 to the downside fell very quickly right into our anticipated US$360-380 zone.  In light of the fact that it moved so violently a mid-week update was released which concluded with the following:

“The chart above is suggesting that the low of US$378 is a reasonable place for a bounce.  Nothing goes straight down and we are inside the range we mentioned though at the very top of it.  Some downside is definitely possible even down to the US$340 level, which would match the low back in April. However, the odds favor some stabilization and a rebound here at these levels. It’s very difficult to judge prices at point of high volatility but we are keeping an eye on the US$440 level for a reasonable rebound to re-evaluate and gauge the atmosphere.

Since that publication, we have see the price rebound up to US$430, so being about $10 off the expectation we need to consider whether that was it and we are headed to a new low, still reaching the level of where prices collapsed (US$440-460 zone) before reversing back to new lows, or if this low of US$378 is here to stay and we are now on our way back to US$500 and beyond. As always, let’s have a look at the big picture.

Unlike last week when we considered the Long-Term view ‘tentatively’ Bullish, the loss of US$440 price levels has now turned this Weekly charts Bearish with indications that more price declines are on the near term horizon. This week’s news has been added and is expanded upon in detail in this report. From the looks of it on the chart, there is a high probability that we will re-test the yearly lows around US$350 and even have an outside chance of falling to April ’13 Bubble top of US$266.

Education (Trading Rules)

We usually use this section to introduce general readers to tricks and tools of traders. In light of the major moves that took place last week, it might be a good time to talk about wealth management.

Everything described here also applies to assets other than Bitcoin but obviously that is our focus here. It is also a good time to point out that these weekly Analysis Reports should not be used as a trading guide, they will always be too slow to react and are only here to help you manage expectation, show you tools to be a better investor and perhaps give you ideas as to the future of Bitcoin’s price you might not have considered.

On that note, let’s go over how a Trader should have played last week’s action assuming they completely agreed with last week’s conclusion. This is where Rules become important, though everyone should decide what works for them; here is a post that digs into rules with some more detail. The 3 rules mentioned there are:

1. Always have a plan (A reason for entering, a profit price target and a stop loss target in case you’re wrong)2. Be patient & don’t panic (This applies to both entering & exiting positions)3. Only change the previous ‘plan’ if the risk/reward ratio will be improved in your favor.

Applying the rules above to last week’s action and assuming that a trader has the ability to take short positions to make money from the downside in Bitcoin, he might have done the following: The plan was to expect prices to fall, then rebound around US$445, so the trader would have been short or just waiting for a bounce at that level. 

Once the bounce at US$442 was noticed, the trader would have bought bitcoin probably around the US$450 price expecting the bounce to be substantial and reach the US$470-480 levels or perhaps even US$500. But it was also anticipated that if the price goes below US$440 then it would most likely continue down into the US$360-380 zone.

So this trader should have been ready to close this ‘long’ position if the price reversed, which it did - about half a day later.  Once the price fell to around US$438 the trader should not have panicked, exited the trade, admitting that the reversal to the upside is not in the cards, and perhaps even taken out a ‘short’ position with the expectation that price will fall below US$400.

If this short position was initiated at these US$438 levels, the trade would once again be considered a mistake if the price goes back above US$445 or so.  If, on the other hand, the trader is correct and the price drops, he should never let a winning trade cost money. So once it fell to say US$410, he would consider exiting this trade if the price goes back to the entry point around US$437 and get out with at least a cup of coffee.

You would also follow the plan for profit tacking (all or most) if the price falls to the expected zone of US$360-380 or it’s vicinity.

This was just one example of how a trader might have profited from last weeks action and it involved a losing trade. Everyone makes mistakes, successful traders are those that recognize and admit them quickly to invest another day.  Next week, we will focus more on longer term Bitcoin investing, which is definitely a better strategy than short term trading.

Fundamentals & News

There was plenty of news this week, some significant and a lot speculative. On the significant side, the news about Isle of Man losing their banking services was a very critical. Yes, there has since been an update that anther company (Instabill) will fill this void, but the damage was already been done.

Stories like this continuously demonstrating Bitcoin’s dependence on the Legacy Banking system. It’s understandable that it is needed for merchant adoption and some business would never accept bitcoin unless it is instantly converted to their local currency, but this is not where the power of Bitcoin is the strongest.

The more Bitcoin is integrated into the current unstable and corrupt [opinions] financial system, the more it is susceptible to price influences by these legacy institutions and Government’s influence on them. As argued in the debate weather PayPal’s entrance into Bitcoin payment processing, we have a lot of merchants accepting bitcoins today, but if they are not holding on to them directly and using them in commerce, they are putting pressure on prices by immediately selling them on the open market through payment processors like CoinBase, BitPay and soon BrainTree.

Nothing bad is being said about these companies that provide a very valuable service, but for Bitcoin to reach the next level they need to be complementary for merchants and not the primary means of liquidation of the bitcoins acquired in exchange for good or services.  This will continue to put negative pressure on prices, though this trend is expected to change once demand to hold bitcoin goes up.

Moving into the speculative side of the news, the reports about a tech IPO causing mass liquidation of bitcoins to speculate in the stock market is beyond a stretch. At the least, it would have been nice to see a statement from just one person that has actually did it. Even if one person can be found, the chances of this person then saying, “well a lot of other people were doing it,” would be slim.

Yes, there was a lot of chatter even in the Bitcoin chat groups about BABA, but these markets are completely different. Even for the small percentage of people that play the speculative sides of both stocks and bitcoins, they would have completely different sets of funds set aside for each. 

We can revisit these types of situations when an Equities Exchange provides the ability to trade bitcoin in the same account. A better case can be made that the Scottish NO vote has a negative influence on Bitcoin’s price. Not directly of course and ignoring the silly what-ifs in having Bitcoin be the national currency, the NO vote symbolizes that too many people are not yet ready for self responsibility and self rule.

Bitcoin is the ultimate way for an individual to be less government reliant and this vote is proving that humanity is perhaps not ready for this mental transition. The debate as to weather independent Scotland would become a socialist state or Europe’s new capitalist free market economic zone is of course now moot, and is left for another day.

“Bitcoin is the ultimate way for an individual to be less government reliant and this vote is proving that humanity is perhaps not ready for this mental transition.

– Tone Vays

On a final note, we have yet ANOTHER Bitcoin organization looking to cooperate with Government and regulators. While the list of members is impressive, while certainly created with the good intentions of being represented by the usual suspects at the top of the Bitcoin corporate world. However, it will most likely add additional pressure to Bitcoin’s price as more and more wealth resources and brain (thinking) resources are being thrown at the bottomless wealth-destructing pit of Government favoritism and corrupt regulators.

Adding to that we now have two organizations (and counting) looking to make crypto-currency certifications, so hopefully this will be done in a constructive way as to NOT create barriers to entry and hence can serve as a positive to the ecosystem. We’ve also heard from authorities in Russia in Bangladesh (8th highest population in the world) about banning Bitcoin, which actually may not be a bad thing from a price perspective. At least everyone now knows where they stand if you are in those countries.

“With every Government Announcement and Industry Announcement for Government co-operation, Bitcoin’s advantage of being the last Free Market slowly dies.”

– Tone Vays

We will save the discussion of how DarkCoin’s price moving significantly in the opposite direction during the week of Bitcoin’s panic selling implies the importance of ‘anonymity’ in cryptocurrencies for next week.

Daily Overview

Fundamentals are important, but so are Technicals. Here is our 1-year Daily chart still referencing Fibonacci Retracements and a few Trend Lines broken back in July.

This ‘intermediate’ term time frame remains Bearish. Not much positive to point to in the charts and will remain that way until price can re-capture and sustain the breakdown levels of US$440-460. US$400 is a nice round number and has the potential to hold the price, but the next line of defense on this chart is the US$340-360 zone matching yearly lows made back in April.

Here is our usual short-term chart also looked at on a daily scale. As you can see we are now way below the moving averages introduced last week and even though our overall stance on the price is still negative, the Mid-Week update suggested that we can consider the current situation as a good place for a rebound.

Conclusion

Our overall stance has been altered to Long-Term Bearish (though the downside is somewhat limited here), Intermediate-Term Bearish but Short-Term Bullish.  We are looking for a potential bounce in prices back to the US$440-460 levels where the most likely outcome from there would be continued selling pressure.  The thickness of the arrows in the charts is proportional to the probability level of set outcomes.

We will also remain diligent of the following situation listed in order of importance.

Bearish: Since the price did already rebound from US$378 to US$430 it is possible that it is as far as we get on the upside before creating new lows.  This will become a reality once price falls back below US$380, in which case look for US$340-350 as the next level of support.

Bullish: If price is able to get back above the breakdown zone of US$440-460 and hold there for a few days, we would then consider the possibility of reaching US$500 as the amount of overhead resistance continues to mount.

Reference Point:  Sunday 2:00 pm ET, Bitstamp Price US$405

About the author

Tone Vays is a 10 year veteran of Wall Street working for the likes of JP Morgan Chase and Bear Sterns within their Asset Management divisions. Trading experience includes Equities, Options, Futures and more recently Crypto-Currencies. He is a Bitcoin believer who frequently helps run the live exchange (Satoshi Square) at the NYC Bitcoin Center and more recently started speaking at Bitcoin Conferences world wide. He also runs his own personal blog called LibertyLifeTrail.

Disclaimer: Articles regarding the potential movement in crypto-currency prices are not to be treated as trading advice. Neither Cointelegraph nor the Author assumes responsibility for any trade losses as the final decision on trade execution lies with the reader. Always remember that only those in possession of the private keys are in control of the money.

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