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Over the past few months, we’ve seen a massive drawdown in several financial markets as the FED started to tighten up the money supply in order to control their massive inflation. As interest rates started to rise, it became likely that the US stock market and other risk assets started to sell off because of their inverse correlation with said rates. Unfortunately, Bitcoin and by extension, the whole crypto market, were affected by this macroeconomic event causing the price action we see this October 2022. Let’s go over the current state of Bitcoin using Technical Analysis (TA) in order to see possible areas where price can potentially go in the future.
“When in doubt, zoom out”. If you’re not new to TA, you’ll have often heard this catchphrase as a way to see the bigger picture in a chart. When applied to Bitcoin, it becomes obvious that despite serious downturns as of late, the chart is undeniably in a multi-year uptrend. Note that this doesn’t necessarily mean it’s okay for you to just buy at any price because if that was the case then everyone would be profitable.
For example, someone buying BTC right around $69,000 would’ve been making a major mistake with many technical indicators such as the Relative Strength Index (RSI) showing a Strong Bearish Divergence. This occurs when there is a higher high in price ($64,000-$69,000) but a lower high in the RSI which shows weakening momentum and is a sign of an uptrend reversal. Sure enough, it brought us all the way from $69,000 to mid-$17,000. This inevitably drove many top buyers to capitulate and leverage traders to be washed out. Now the million dollar question is, “Is the bleeding over?”
To be frank, there’s no one who can say for certain when the bottom is but there have been a lot of interesting developments in the charts. Looking closely, we can see that Bitcoin has done something it has never done before. Over the past few months, we came back down from the latest all-time high of $69,000 to test the previous 2017 all-time high at around $20,000. This isn’t necessarily something bearish. Many long-term investors, in fact, look for price drops like this to start buying. Technical Analysis defines this phenomenon as a “throwback”. A throwback is when price corrects back towards a previous resistance zone (or even a bit below) after breaking out from it. In this case, the resistance zone would be at around $20,000 (previous all-time high) and some traders/investors will look to turn that previous resistance zone into a new support. This may be why we’re spending quite some time consolidating around the $17,000-$25,000 area to see if a throwback can turn into a bullish continuation pattern.
Another popular indicator in technical analysis would be moving averages (MA). Different people use different lengths for their own strategies but on the BTC monthly chart, it appears that buying near the 50 MA (blue), where we are right now, has proven to be quite profitable as it was usually near the bottom.
Though some of the best long-term investing buys have come from buying up macro-throwbacks, it would be wise to remember that Bitcoin is still a relatively new asset class without much price history to back it up. There is still a possibility that it can continue lower. Bitcoin started and thrived during the period after the 2008 Global Financial Crisis which is why it has yet to be tested during difficult economic times.Therefore, it is not enough to simply trust blindly that previous all-time highs will hold. Read more about the History of Bitcoin here.
In the same manner, note that not all throwbacks show demand strong enough to hold the previous breakout level. Furthermore, though the monthly MA 50 has acted as a strong support for Bitcoin, we had never actually closed below it until now. At present, we have started to consolidate below it which can be viewed as a bearish sign.
Let’s move down a timeframe to the weekly chart to have a better look at which levels Bitcoin can go!
“The trend is your friend until it bends”. This is another TA saying that reminds us to not fight the momentum in the market. Looking at BTC on the weekly, it is still very bearish despite some recent sideways consolidation. This quote doesn’t mean that you shouldn’t buy now if you’re a long-term investor but only that you should be quite cautious with calling bottoms. We can only be quite sure something was at the bottom once we’re already way above that price point. For now, let’s review the makings of this weekly downtrend!
An upthrust is a false breakout to the upside. This occurs when price barely gets above a resistance and then immediately dumps down in the opposite direction. We are often taught early the higher highs and higher lows are good but it’s also important to check if the higher high was able to hold or have a follow-through or else it was just there as a false bull signal. You can see this clearly on the weekly chart if you mark a resistance zone around $60,000-$64,000 and see how BTC was not able to hold above it for long.
Following the upthrust, market bulls were calling for $100,000 due to price making a higher high and thus tried to buy up every correction. Unknowingly to many, the major downtrend had already begun. This was all the more confirmed when BTC was consolidating around the $33,000-45,000 range after an upthrust from $69,000. Drawing a trendline (yellow in the chart) from these two upthrust tops also show a clear bearish momentum and price has been respecting it even until recently.
In terms of weekly levels where Bitcoin could go, we’ll first discuss the macro supports (bearish scenarios) and talk about the upside in the daily chart since it is much more evident there. In terms of finding demand zones, we could see a lot of possible buyers around $10,000-$14,000 since there was a lot of price action occurring previously in that zone. This, of course, is only in the case that the throwback to $20,000 that we discussed in the monthly chart does not hold.
Lastly, let’s go over the daily chart to see the current range we’re trading at along with short-term upside potential!
Getting into the meat, let's study the horizontal ranges we’re trading in. Following the breakdown from the previous range at $28,000, BTC has bounced around $17.6,000-25,000. Looking at the chart, there are 3 key horizontal levels.
Price moving outside those levels can be seen as deviations. When price previously broke past the top of the range, it should’ve rocketed straight to the previous $28,000 range due to a lack of resistance in between. Instead it started consolidating slowly above $23,000 which became another upthrust and fell right down. Likewise, price falling below the bottom of the range, though $17,600 was the low, showed weakness but recent drops below have also been bought up forming a “spring” (the opposite of an upthrust where price falls below support but immediately pumps back through it).
Currently, we’re still waiting to see the outcome from this range. Taking it level to level, breaking up above the top of the range should bring BTC straight back to the $28,000-32,000 range. On the other hand, a strong breakdown below the bottom of the range would probably zoom past $17,600 and bring us to the $10,000-14,000 support zone.
In conclusion, the overall picture shows that the outlook is bearish but no one really knows where the market will go. TA is just about seeing probabilities and applying risk management to reduce downside. If you’re investing based on fundamentals, TA can be a tool to help you find optimal entries. Nothing is certain in investing but it’s better to at least have a plan in either direction so you won’t panic regardless of where BTC or any market ends up.
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