Bitcoin Bottoming Out or Breaking Down
Updated
Bitcoin is nearing the end of it’s month-long potential bottoming out. This process has suffered from traders not able to see the forest through the trees. First, there was the V-Bottom reversal theory. Then there was the Bear Pennant break down. Then there was the Double Bottom reversal. But after all this time, it could be an Inverted Head & Shoulders.
As traders, we don't get to pick the bottom, we let the bottom pick itself. So if we're always blind to the structure of a bottom, how can we trade better to avoid surprises? What lessons can we learn from this month? Here I provide three. Then we apply these lessons to our current scenario.
Lesson 1: Hold Your Biases Lightly[/I]
It's tempting to catch the bottom of a reversal, but if you're not careful, you'll only catch a pullback. Unless you have the capital and risk to hold a negative position, play the short game instead of thinking that each bottom is "the one". It's important to have a bias, bullish or bearish, but make sure the length of time you're willing to be biased matches the above criteria. The reversal structure is always unknown, so be prepared to shed your bias at the drop of a hat. Know your support and resistances, and simply buy and sell the signals. Don't worry about missing the reversal, that's greed and emotion controlling your account, not process. Accept your lack of control and just follow your process.
Lesson 2: Find the Ideal Entry and Exit, then Choose the Non-ideal[/I]
Traders are always searching for the least risky entry and exit. It's always somewhere in the relative extremes and contain some ideal technicals. These are definitely safe trades, but these prices are almost never reached. Consider the bounce from $5,750. This is a minor support compared to the support around $5,000. If the bear pennant didn't fail, this major support might have been reached. But, according to the Laws of Bitcoin, this entry was too ideal, so the more aggressive entry was where our current bottom was found.
Lesson 3: Listen to the Prevailing Forecasts, then Ignore Them[/I]
Before our double bottom, forecasts were littered with mentions of $5,000. Then after our double bottom, forecasts switched to the next important level, $7,000. According to Lesson 2, we already know these levels are too ideal. But there's something more sinister at work when we listen to the forecasting echo chamber: we're more likely to ignore our own analyses and signals in favor of the prevailing wisdom. Karl Marx once said, "When the train of history hits a curve, the intellectuals fall off." Relying on prevailing forecasts is dangerous because they become prevailing mostly based on their emotional attractiveness. The effects can usually be seen through an increase or decrease in long or short positions that leave a movement in the opposite direction vulnerable. Know what traders are expecting, ignore them, then apply lessons 1 and 2.
[I]Where are we now?[/I]
We dropped from $6,800, thanks to the $7,000 prevailing forecasts, so now we apply our lessons. 1.) I’m bullish, so when do I become bear? My scenario is an Inverse Head & Shoulders. For it to remain reliable, the right shoulder must be higher than the left. This signals bullish strength in the pattern. So if we go below $6,120, I’m bear. And if we go up, but are rejected at the neckline, I’m bear. 2.) The ideal entry is around $6,000. This is the strongest, closest support, and is the best price that maintains a higher-low; comforting for bulls. But it’s too ideal. If we go up, it will be from a more aggressive option: where we are now, $6,260+. 3.) Coindesk's view is that we will test $6,000 in a day or two, so we ignore this. Let people think we’re going down further to more ideal levels, and wait for their short positions to facilitate our move back up while maintaining our bullish Inverse H&S. I do love it when a plan comes together. Let's see where our logic takes us.
As traders, we don't get to pick the bottom, we let the bottom pick itself. So if we're always blind to the structure of a bottom, how can we trade better to avoid surprises? What lessons can we learn from this month? Here I provide three. Then we apply these lessons to our current scenario.
Lesson 1: Hold Your Biases Lightly[/I]
It's tempting to catch the bottom of a reversal, but if you're not careful, you'll only catch a pullback. Unless you have the capital and risk to hold a negative position, play the short game instead of thinking that each bottom is "the one". It's important to have a bias, bullish or bearish, but make sure the length of time you're willing to be biased matches the above criteria. The reversal structure is always unknown, so be prepared to shed your bias at the drop of a hat. Know your support and resistances, and simply buy and sell the signals. Don't worry about missing the reversal, that's greed and emotion controlling your account, not process. Accept your lack of control and just follow your process.
Lesson 2: Find the Ideal Entry and Exit, then Choose the Non-ideal[/I]
Traders are always searching for the least risky entry and exit. It's always somewhere in the relative extremes and contain some ideal technicals. These are definitely safe trades, but these prices are almost never reached. Consider the bounce from $5,750. This is a minor support compared to the support around $5,000. If the bear pennant didn't fail, this major support might have been reached. But, according to the Laws of Bitcoin, this entry was too ideal, so the more aggressive entry was where our current bottom was found.
Lesson 3: Listen to the Prevailing Forecasts, then Ignore Them[/I]
Before our double bottom, forecasts were littered with mentions of $5,000. Then after our double bottom, forecasts switched to the next important level, $7,000. According to Lesson 2, we already know these levels are too ideal. But there's something more sinister at work when we listen to the forecasting echo chamber: we're more likely to ignore our own analyses and signals in favor of the prevailing wisdom. Karl Marx once said, "When the train of history hits a curve, the intellectuals fall off." Relying on prevailing forecasts is dangerous because they become prevailing mostly based on their emotional attractiveness. The effects can usually be seen through an increase or decrease in long or short positions that leave a movement in the opposite direction vulnerable. Know what traders are expecting, ignore them, then apply lessons 1 and 2.
[I]Where are we now?[/I]
We dropped from $6,800, thanks to the $7,000 prevailing forecasts, so now we apply our lessons. 1.) I’m bullish, so when do I become bear? My scenario is an Inverse Head & Shoulders. For it to remain reliable, the right shoulder must be higher than the left. This signals bullish strength in the pattern. So if we go below $6,120, I’m bear. And if we go up, but are rejected at the neckline, I’m bear. 2.) The ideal entry is around $6,000. This is the strongest, closest support, and is the best price that maintains a higher-low; comforting for bulls. But it’s too ideal. If we go up, it will be from a more aggressive option: where we are now, $6,260+. 3.) Coindesk's view is that we will test $6,000 in a day or two, so we ignore this. Let people think we’re going down further to more ideal levels, and wait for their short positions to facilitate our move back up while maintaining our bullish Inverse H&S. I do love it when a plan comes together. Let's see where our logic takes us.
Note
Bitcoin broke through its most aggressive bullish entry price, and now it’s testing its less aggressive price at $6,160. The least aggressive, and most ideal, bullish entry is at $6,000. We know not to expect the ideal from Bitcoin, and not to listen to the word on the street, so we expect the current price at $6,160 to hold if this is a reversal. This is on the edge of invalidating my strongly bullish Inverse Head & Shoulders. The bottom of this possible right shoulder is now only slightly above the bottom of the left. The pattern is now almost symmetrical. But I’m getting early signals from PRO Indicators that we could go up from here. The next 4 hours are crucial, so I will post an update then.Note
Here is my update. Big questions and few answers. The only thing to do now is to be patient.
Note
Another exciting daily close for Bitcoin. It was a close one for this scenario! We managed to defend the left shoulder’s low in the creation of a possible right shoulder, which could give us an almost symmetrical inverse head and shoulders. The previous daily close didn’t manage to muster enough bulls for the most aggressive bullish entry at $6,260, but it looks like we might have found enough buyers at our less aggressive entry around $6,120. Like a Goldilocks price, not too aggressive, not too ideal...just right. It’s still too soon to call this a right shoulder, but the daily candle’s long lower shadow is certainly indicative of a move to the upside. The bulls will have to follow through in the next day or two. If they do, or if they fall asleep at the wheel, I’ll be back for a new post. But sleep easy knowing that we’re close to narrowing down the future to a single scenario. Then we can begin to set some targets.Note
Nothing to report so far today, and there might not be any real price movement until around the daily close. To form the right shoulder, we want to see this flag extend itself this weekend, especially by the weekly close. If it fails to extends, we'll go down to $6,000 - $5,900 to find more bulls, but if we don't find enough and break lower, the Inverse Head & Shoulder is invalidated. Just remember that continuing up is not guaranteed. Expect every series of events, no matter how uncomfortable, see them play out in your mind, and you'll never be surprised.Note
So yesterday the bull flag failed, but the failure wasn't as bearish as expected, as we didn't make a lower low since our drop from the neckline. This formed a bullish double bottom, so it looks like the bulls who missed out on their entry at the bottom of this possible right shoulder got a second chance. This is definitely a bullish sign, and improves the odds that we are indeed forming a right shoulder.Note
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