Another Day, Another Correction In Bitcoin

Stock investors consider a 10% decline to be a correction. Bitcoin investors must now consider a similar move to be just another day at the home office. As I write this, the largest cryptocurrency is down just over 10% with no apparent catalyst for the move. By the standards of any normal investment, this is eye-watering volatility. But bitcoin is no ordinary investment.

Long ago I wrote about the staggering momentum in both bitcoin and Tesla (TSLA). Actually, it was just under two weeks ago – Friday, January 8th. It just seems like long ago in crypto-trading time. In that piece, I warned that “Parabolic moves usually come to a nasty, unpredictable end. But timing that result is nearly impossible, and the catalyst is often something trivial.”By the following Monday, bitcoin had fallen nearly 30% with no apparent catalyst. Traders used that volatility to buy that dip, causing bitcoin to nearly recoup all its gains by the end of that week. But a new high was not to be found, and we have since seen a pattern of dips and lower highs (see graph below). That is not a positive technical sign.

One Month Graph of Bitcoin with 30 Day Candles

(Click on image to enlarge)

One Month Graph of Bitcoin with 30 Day Candles

Source: Bloomberg

If we look at this chart agnostically, without thinking about the investment that is being graphed, we see that pattern of lower highs and descending moving averages. That is a negative. On the plus side, we have not broken the 29,000-30,500 support levels. Those would be a key test of the recent rally. A failure could have some nasty implications, as seen in the graph below.

One Year Daily Graph of Bitcoin with Fibonacci Retracement and Moving Averages

(Click on image to enlarge)

One Year Daily Graph of Bitcoin with Fibonacci Retracement and Moving Averages

Source: Bloomberg

This is a phenomenal performance, and those who bought bitcoin anytime in the first three quarters of 2020 and held it into 2021 were richly rewarded. We can also see the parabolic move that the cryptocurrency underwent during the fourth quarter. That type of advance leaves us very extended. The 61.8% retracement and 50-day moving average roughly converge around 27,500. That would be a logical next stop if the short-term support is breached, and that would be another 10% down from here. During most of the prior year, bitcoin used the 100 and 200-day moving averages as support. A retreat to the 100-day average would be a nearly 50% retracement from the recent highs. 

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Disclosure: BITCOIN FUTURES

Trading in Bitcoin futures is especially risky and is only for clients with a high risk tolerance and the financial ability to sustain losses. More information ...

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