BTC Chart Formations, Trendlines and Divergences

2021年7月3日

Chart Patterns
2018 was an interesting time. Bitcoin had gone berserk and there where both prophets of prosperity and doom preaching about the future of bitcoin and all the new folks had to decide if they still wanted to play and what to do with their money. Lots of people correctly identified this descending triangle but many people were so bullish they saw it instead of being a triangle being a saucer or a cup and handle, basically anything but a bearish formation. I remember being uncertain as well, at times I played the triangle resistance very will with some outstanding shorts and other times I made some trash trades.

It takes way more experience than people think to trust a chart formation and trust the targeting on it. Especially with triangles, they are some of the easiest of formations to recognize but they have some of the worst performance. The Head and shoulders is different. Mr. Bulkowski wrote one of the most important texts on charting with ranking patterns on chances of throwbacks, chances to get full performance, and average performance. The head and shoulders is 9 out of 36 for reaching target, so it is in the top quarter formations you could try to play. thepatternsite.com/hst.html

Stats on the head and shoulder from traditional markets
Break even failure rate: 19%
Average decline: 16%
Pullback rate: 68%
Percentage meeting price target: 51%

Highlight from the trading tips
Velocity: A high velocity rise leading to the pattern often results in a larger decline post breakout.

Since we had a high velocity move into the pattern we can expect a larger decline than traditional targeting would suppose. But since we are on the log scale traditional targeting gets harder to do and so we have to use fib levels. And the target based on fibs alone is show and it is below the previous high.

Trendlines
Various chartists have correctly identified some long term trend lines that would act as support here and I have mocked one of them up in magenta. Thing is people were hoping for the exact same thing with the purple trendline before the big dump below 5.7k. Now obviously every chart formation is made out of support and resistance and therefore some trendlines. But trendlines flip from resistance to support all the time and when they fail they can fail to violent price action. Horizontal levels as well as angled trendlines can fail as support or resistance and you cannot guarantee that this magenta trendline, or a similar one, will hold forever.

Divergence
I am a big believer in divergences but I have many times looked at getting into a move way to early because I was not patient enough. Moves often will have a combination of hidden and cassic divergences in them. For a bullish example price action can display bullish divergence by setting a higher low on price and a lower low on the indicator but until that low has bullish divergence within itself it won't trigger, and that often occurs in waves of three. Hopefully this chart below will help. I don't forecast BTC having a sustained uptrend until we see classic bullish divergence on the weekly within the low that is still developing.



Conclusion
More downside and then a lot more upside. Until I get an invalidation of the head and shoulders or another major signal of trend change (like getting a whole candle above the 20 week SMA) I am still bearish. Please see the linked post for target setting.