Bitcoin support broke. What’s Next? Let’s discuss the Bitcoin picture and more importantly, technical analysis (TA) in general.
Support at 40,000 broke convincingly today, as expected. The 40K line was tested five times and held. The sixth failed.
This is the expected behavior. The more often support (or resistance) is tested, the more likely it is to break.
There is only minimal support at 38,000 but it could hold. The 38,000 level was a breakout zone after about a month of upward sloping consolidation. If the 38,000 level fails, then technically, there is likely to be a test of the 34,000 to 36,000 area.
Daily Technical Setup Warning
The daily technical pattern for Bitcoin is weak. The pattern includes a big air pocket coupled with euphoria and continual hype over ETF approval.
The air pocket could easily collapse all the way to 30,000 and that would not at all be surprising.
This is a warning not a prediction.
Bitcoin Weekly Chart
The weekly technical picture is not great either. There is minimal support at the 35,000 level with a potential test of a breakout at 30,000.
There is strong support at 25,000 which I would expect to hold, at least for a while, if it gets there. If that fails, there is additional support near 20,000 then not much until the 15,000 to 16,000 level.
Should Bitcoin fall to 15,000 I would expect a big bounce at that area, back up to 22,500 or 25,000. First, I would expect a big bounce at 25,000 or so, back up to 30,000.
Technical Analysis
Technical analysis (TA) is a tool. It is not a forecast. Rather it is a “If this then that is likely” idea.
Many think it is preposterous voodoo. But many technical traders don’t bother with fundamentals at all.
Used properly, TA is a good tool. One can buy at support and exit if it breaks. TA provides good entry and exit points for traders.
Why TA Works
Suppose you bought Bitcoin at the 48,000 level anytime in the past only to watch it plunge to 15,000.
You say to yourself, “If I can ever get out even, I will sell”. Many who bought at 48,000 will be thinking the same. Technical traders are aware of this idea and are willing to short at such spots.
Next, look at that 25,000 area. People debated getting in but didn’t, and regretted it. When Bitcoin hit that level a second time, many jumped in. Technical traders plowed in.
TA works for two reasons. The first is that many people, not even aware of TA react on it. Darn I wish I bought. Or darn, why the hell did I buy, I want out if I can break even.
The second reason TA works is traders who do understand TA are willing to take actions at support and resistance. The combination is self-reinforcing, not voodoo.
A Maxi Debate: What is Bitcoin and What is Money?
A Twitter exchange on Bitcoin caught my eye. I wade into deep waters of the debate, but first we need to agree on a definition of money.
For a discussion of the fundamental picture and whether or not Bitcoin is money, please consider A Maxi Debate: What is Bitcoin and What is Money?
Yes, TA can help, but over-reliance on TA practically guarantees that you will get blown off the wharf sooner or later. If you keep an eye on TA, you should also keep an eye on leverage. The leverage builds up in cycles and there are periodic washouts when the gamblers get liquidated.
Bitcoin is volatile. It increased 160% in 2023, but now it has pulled back 20% from the intra-day high earlier this month — and people are shouting “The sky is falling, the ETFs failed to deliver.” What rubbish. The best comparison is to the GLD ETF — which is not perfect, but perhaps the closest analogy. If you look at the 50 year gold chart, and you find the point that is November 2004, when GLD launched, you see a small dip after that, and then gold went on a monster multi-year bull run. Of course correlation is not causation, and there were a lot of macro events in the background from 2004-2009, but the key point is that a massive bull run followed making gold more widely available through an ETF wrapper.
Mish asked for predictions before the ETFs started trading. My prediction was that BTC would be volatile, but will end the year significantly higher. The first part of my prediction has come true, now we wait a year and see if the second half also comes true. Best approach is to stop trading and DCA over the next two years, perhaps increasing the purchase amounts slightly on pullbacks and washouts, and decreasing the amounts when leverage builds up.
“Many think it is preposterous voodoo.”
It is. All supposed “systems” for picking random numbers, are.
“But many technical traders don’t bother with fundamentals at all.”
Why would they? It is, after all, just random series.
Remove the noise, and it makes not one iota of difference whether one’s “system” for picking random numbers is “technical” or “fundamental.” Nor whether one trades with the intent of “making” money or “losing” money. How much one actually makes or loses is, modulo random variation, entirely dependent on how much The Fed inflates, and on how close one is to The Fed. That’s it. The rest is just there to make lightweights feel that what they do, in any way differs from what any other welfare recipient does. Which it doesn’t
TA is a great tool, and takes time and experience to use properly. The best book on the subject is “Technical Analysis of the Futures Markets” by John Murphy. There so many different ways to make money in the stock market, and finding the right tool that suits your nature is a gift.
Think about the logic behind TA. It’s based on historical prices which are available essentially for free to everyone. Why then would you expect there to be profitable, undiscovered alpha-generating investment opportunities? Note that I’m not saying that you can’t make a positive return with TA. I just haven’t seen anyone use TA to produce returns that outperform the market when risk (volatility) and trading costs are taken into account.
It works until the black swan. Then traders apply at a fast food restaurant.
TA works until it doesn’t. There are only two things that are absolute in the markets, volume and price. Everything else is open to interpretation.
Technical analysis sort of works because there are two factors that are hard to see in the raw data. The first is noise. Trend lines, support, resistance, a lot of that is just finding out what is 2 standard deviations of noise as compared to signal. The second factor is that most people are trying to model a market that is fundamentally sinusoidal with lines. There are probably 3 or 4, maybe more, sinusoidal patterns of various periods and magnitudes overlaying each other and driven by fundamentals. These could be interest rates, recession/expansion, 401k flows, technological developments, corporate events, plain old enthusiasm, and others. Technical analysis helps identify when the sum formula of the various sinusoidal patterns has reached an inflection.
So let’s say you have a strong up-thrust underway. The reason you draw the trend line along the lows is so that you don’t get false signals due to noise; otherwise the averages would do. But when that trend line breaks, it is a warning that the sinusoidal patterns may have reached an inflection.
In the case of a resistance line that gets tested 5 times, well, the resistance line is a psychological formula, everyone is drawing it at the same place. But the sinusoidal pattern may have actually peaked somewhere around the 3rd test and swung down. If that is the case, the resistance will not hold. Once the resistance is broken, all the people who were drawing that same line in the same place give up on it and trading resumes the underlying pattern down.
This is why some technical traders don’t need fundamentals. If you are good enough at it to determine the wave patterns through the noise, all fundamentals will tell you is what is driving the wave patterns. But the danger of trading fundamentals without technical is that not only do you have to get your fundamentals 100% right, but also the timing. All you have to do is trade natural gas for a while to realize that supply and demand fundamentals are great until the weather changes.
Bitcoin is worthless except for the fact that there is a cult that believes it’s worth something.
These cult members live in DelusiSTAN… they are DelusiSTANIS.
Most of the DelusiSTANIS I know believe BC is going to 500k and will replace the USD – therefore they were telling me at 60k+ it was still a bargain and that I should still get in (I betcha they were still buying at that price cuz they believe).
Flare gas to bitcions
Private equity is setting up server farms on gas well sights and using the (usually burned off ) flare gas to run large generators to run the severs. How can proof of work continue as common methods of bitcion farming become too expensive?
The NYT had an interesting article on the new Bitcoin EFT’s a few days back.
—–
Bitcoin E.T.F.s Come With Risks. Here’s What You Should Know.
Federal regulators have made it easier for everyday investors to buy funds that track the price of Bitcoin, using traditional brokerage accounts. Most financial advisers remain skeptical.
By Tara Siegel Bernard
Jan. 19, 2024, 9:00 a.m. ET
Nearly a dozen new investments funds that hold Bitcoin began trading last week, making it easier for anyone with a basic brokerage account to buy a slice of the digital currency.
Several established financial institutions, including Fidelity and BlackRock, have coalesced around Bitcoin because it is the world’s first and largest cryptocurrency.
But Bitcoin remains an enigma to most everyday investors, and it’s hard to separate the buzz from any true potential. It’s also wildly volatile.
In other words, it’s a bet. And institutions are wagering that plenty of investors want in.
But putting crypto into a traditional investment wrapper does not paper over the underlying risks. Here’s a look at how it works:
…
https://www.nytimes.com/2024/01/19/business/bitcoin-etf-investing.html
Technical Analysis works well….in the rear view mirror.
The stock market is a casino. Your bets might fail 50%/60%, mostly bc u entered too early, but in the long run, if u have enough TA knowledge and guts, and if u cut your losses fast, u can win. The stock market can keep u sharp at old age. U can always learn a lot. Many Mish commentators love fundamentals. TA confuses them. Do I have discipline : no !
Yes but in the end you really can’t beat the market consistently. You can think it a while though. Technicals are about human behavior. Humans aren’t that much predictable. You can’t beat the house. The house has a stacked deck.
1W : Dec 4 : RSI 83.20. 1D : RSI 34.93, in negative territory. My comments are for fun and entertainment only.
BTCUSD Backbone : Jan 8/11 2021, 42,000/30,261. In order to move up there must be a weekly close above Mar 28 2022 high.`1D : Jan 17 flop lower. 1W : Jan 15 flop. 1D : price under the cloud. The front end turned red. Chick on the cloud. 1W : inside T&K, far above equilibrium. The cloud is green. Chick above price. RSI entered negative territory. Price might bounce up within a few days.
I’ve been in the investment industry for 40 years and have yet to meet any trader or portfolio manager that uses TA exclusively that has generated statistically significant alpha. There may be some short-term, self-fulfilling prophecy price action but since technicians are all looking for the same types of patterns, it’s by definition impossible for all of them to make money since they would all be on the same side of the trade.
Gamma investment is well above my grade. If the large traders herd together they might create a trend. That’s why the mag 7 are up, dragging QQQ & SPX with them.
It can help but it can also deceive. TA is a fickle mistress. Patterns seen by too many self-destruct.
;
When TA fails u, cut your losses fast, curb your ego.
Much depends on how much AI is doing the trading. Will it find patterns that the human mind cannot perceive?
Thanks for fleshing TA out Mish. Much appreciated!!!