Bitcoin Analysis: Week of Aug 10 (Intro to Volume)

Last Week’s Review

In last weeks post we concluded with the following statement:

Friday’s close will help guide us whether we can once again approach the 50% Fibonacci Retracement zone at US$625-650.  The odds however slightly favor more downside into the US$500-530 zone.

Friday Aug 1st started out as an impressive day yet sold off near the end. As a trader of the Fiat Financial Markets it would have been reasonable to pull the trigger and try and take advantage of the upward momentum, but keep in mind, the medium term trend is still down and the trader should have realized within a few days that the breakout back to US$625 is not imminent.  Let us now take a look at the long-term view and see where we stand.

Please notice that the comments have once again been changed back to a white background since we have not made any changes from last week. In fact not much at all has changed from last week other then the price is suggesting a higher probability of the continuing pull back for the time being which we will further explain when digging into the Daily Charts.

Education (Intro to Volume)

Volume is a tricky indicator because it’s not really an indicator. In the world of Bitcoin it take on several new dimensions, which are not even fully understood as to how they can affect price. In the Fiat Finance world there are many things advanced technicians do with Volume, but in reality it is merely something to pay attention to and only dig deeper into it when things look strange. 

As a rule of thumb, you want for big up-moves in price happening on large volume days. So taking the opposite approach, what you want is for the price to go down on lower volume as an indication that it’s just a pull-back and it should once again continue it’s upward direction in the near future.

In the Bitcoin world, however, volume takes on multiple dimensions. The volume you see in the chart above is just the trading that goes on at one of the Exchanges. The Exchange used in the series is not even the one with the highest volume, which as you can see from the pie chart clearly belongs to the Chinese Exchanges.

We still refer to Bitstamp for several reasons: besides having a bias to display the price in USD, it has a sufficient history in the charting tool, and the possibility that a significant portion of that volume in china is done by Algorithms. All in all Bitstamp, gives us a reasonable overview but you have to be careful in analyzing movements to the nearest dollar unless you are convinced every exchange had the same move.

It’s also important to remember that volume overall in the Bitcoin Ecosystem is very dynamic. Miners are still generating significant amounts that need liquidation and it is hard to say how much trading really goes on in  a peer-to-peer way outside of the exchanges. One way to see what might be happening in the overall transaction game is to keep an eye on the graphs provided by Blockchain.info.

You can see in the graph below that all of a sudden the network is experiencing a 3-month high in transactions, but it’s hard to make a definite conclusion on what it means not only in terms of price, but also in the ecosystem in general. Let’s see how the cyclical weekend low in transaction fairs in the next few days.

We will save the following idea for another time, but keep in mind that unlike the Equity world, Bitcoin has way too many uses and trading it is nothing more than a hobby for a few. Its price is a reflection of its use more then of its trading, so when big players like Dell and Expedia enter the Ecosystem and get some of those savers to spend some bitcoins, the dynamic changes.

It may generate additional transactions but these companies usually want them converted at the best possible price at the time.  However, as acceptance grows and we hit a point of exponential adoption, it will cause an exponential increase in price even if no one is converting to local currency.

Fundamentals (aka News)

Once again the news in the Bitcoin world has been slow and not much happened over the last week that is worth expanding upon.  Just want to take this chance and link to a few sources I use on a weekly basis to make sure nothing is being overlooked and get a nice overview of what others feel is important.

Weekend Roundup in Cointelegraph by Armand Tanzarian Weekly Newsletter by Jake Smith Weekly Newsletter from Brave New Coin

Daily Overview

We will continue this view of a 1yr look back for the time being to capture the last great exponential rise.  Once again we are referencing Fibonacci Retracements and a few Trend Lines which were recently broken.

Not much has changed at all.  The only thing that we have added to this chart is a Descending Triangle that appears to be taking place.  We will talk more about Chart Patterns in next week’s Educational section but for now, just keep in mind that these types of triangles build momentum and usually have significant movements upon a breakout/breakdown. 

Theoretically, the price can break out of this current triangle in either direction, but in practice Descending Triangles, like the one that is forming, break to the downside slightly more often than the upside. To be prepared for either break, the triangle is indicating a possible momentum move of US$120 (difference between the height and horizontal base). We hope that if this happens to the downside that perhaps our Fibonacci Support zone of US$500 – 530 can cut that move in half, but we must be prepared for the worst case scenario.

Let’s now zoom in a bit on the last few months and see if we can spot any other patterns, because let’s face it, our brains are programed to look for patterns.  The hard question to answer is that once a pattern is noticeable by you and more importantly other traders, is it going to continue or is it a sign that it’s time for it to break?

In this chart we added a few more observations.  The blue boxes point out that the last two days of price increases look like the latest installment of a 2-day rally. Again it is important to point out that very often the moment a pattern becomes obvious, it usually breaks down either because we are interpreting something random as significant or because too many traders see it and take the same position making it one sided.

This can cause a reversal since there is no one left to agree with the majority view. Lets also take a look at what is happening in volume since this was the focus of our educational section. Volume might not be as relevant as it is in the equity space, but we can think of it as how much interest there is to buy vs. sell. 

As you can see, all of these 2-day rallies did not come on any significant volume.  The cumulative buy volume from these 2-day rallies would come up short to the sum of the selling volumes for the stretch of days that preceded them. This is usually an indication of more price pressure ahead.

Conclusion:

There is no indication in the charts that a breakout in price is in the immediate future. Any Bitcoin follower of course should know that this game of guessing where the price will be next week is a fool’s errand as things can turn on a dime.  All we can do is try to catch the next breakout or breakdown like what happened upon the break of the 6-month Trend Line back in May.

For now keep a close eye on the edges of this 3-month Descending Triangle in the making. Be mindful of head-fakes and be smart with your money. In order to really be optimistic about a potential breakout, the first step is to get above last Friday’s highs in the low US$600’s, then break above the triangle in the daily chart.

The odds, however, favor more downside back to the base of the triangle at US$560 and breaking below that should take us down into the US$500-530 zone where the Fibonacci’s will have a chance to create a healthy reversal.

Reference Point: Saturday Aug 9 2:30am ET, Bitstamp Price US$589

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.

Did you enjoy this article? You may also be interested in reading these ones:

Bitcoin Analysis: Week of Aug 3 (Intro to Candles)

Bitcoin Analysis: Week of July 27 (Introduction to Daily Charts)

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