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Mike McAra

Mike McAra

Mike is a quantitative analyst focused on the economic reality, not theoretical models. His investment thinking is grounded on empirical evidence and common sense.

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Things Are Beginning To Look Up For Bitcoin

BTC

The last couple of weeks have been disheartening for Bitcoin bulls. The currency has been on a move down. Is this about to end? The answer to this question determines whether the profits on our hypothetical positions are about to grow.

News has come out that the recent move down might be over. In an article on the Forbes website, we read:

The plunge began Sunday, with several factors possibly feeding into it, including a cyber-heist that hit South Korea’s Coinrail cryptocurrency exchange—even though no bitcoins were stolen—and a U.S. regulatory probe into Bitcoin price manipulation.

Bitcoin’s price fell from more than $7,600 on Sunday to little over $6,100 on Wednesday, marking a four-month low for a virtual currency that has already fallen precipitously from its almost-$20,000 high last December.

However, it seems that was the bottom for now. Early Thursday, the price jumped up above $6,500, and at the time of writing it seems to be holding at that level.

The cryptocurrency-whisperers over at Coindesk reckon that, even if there is a brief rally now, the market remains bearish and Bitcoin may still fall below $6,000. That last happened back in February.

We don’t necessarily support the idea that the news from Korea is behind the fall itself. It might have been a trigger but it seems that the move down is more an extension of a longer move down than anything else. The move down has been somewhat stopped recently. Is this a bottom? Related: How Will Social Security Remain Solvent?

Here, we agree with the opinion that the recent action doesn’t really mean that the decline is over. So, what might be read as a rebound and a potential beginning of another rally, might actually be a short-term pause in between serious declines. Does the short-term situation support this view?

Rally Erased

On BitStamp, we see that Bitcoin has stabilized around $6,500 and that the volume has declined. This is a bullish piece of news, right? Well, not really.

(Click to enlarge)

If you tak a look at the Fibonacci retracement levels based on the April-May rally (lines with percentages on the above chart), we see that Bitcoin has come all the way down from the early-May top to the level of the beginning of the rally. This mean that the move up as a whole has been erased. This is a bearish indication.

There’s more to that. Bitcoin is currently around $6,500, very close to the April 1 local bottom. Actually, the currency went below this level but came back above it. This, on the face of it, is a bullish indication. It might be one for the next couple of days. The RSI tells us that Bitcoin is not oversold any more, which also might be a short-term bullish sign.

The problem with the above bullish signs is that they are shadowed by a very serious indication that the currency might be about to trip the wire and move down substantially.

Bearish Triggers All Around

The long-term Bitfinex chart suggests that the recent action and the April 1 local bottom mentioned above might be important development as far as the long-term Bitcoin prospects are concerned.

(Click to enlarge)

The above chart shows that the April 1 bottom (horizontal line in between the 78.6 percent and 100 percent retracements), together with the February 6 local bottom, form a support area at $6,000-6,500 which might be quite important for the long-term situation. And Bitcoin is right at the upper border of this channel.

Related: Should Investors Start Lining Up For North Korea?

What this means is that we might see a breakdown below either of the boarders of this area, the $6,000 being the more important one, which in turn might produce pretty sizable moves. In other words, between $6,000 and $6,500 Bitcoin might fluctuate but it is also possible to see a deep decline from any point within this channel.

The most important point is that the volatility might get hairy, so getting out of the market in anticipation of a correction to the upside, based on the short-term signs, might backfire as increased volatility could result in Bitcoin reversing, piercing down through the support area and declining substantially. The other thing to keep in mind is that below $6,000, the next important support level is $5,400, the November local bottom and the base of the rally which took Bitcoin close to $20,000.

So, while it might be tempting to get out of the market at this point and wait for the currency to reverse, we are of the opinion that the potential volatility and the odds of a serious move down support hypothetical short positions. Instead of focusing on the next few days, we would rather have you focusing on the next couple of months and on the long-term prospects for your positions. Arguably, they are much more important and we would really enjoy your profits on the hypothetical positions growing even further.

Summing up, the recent move up hasn’t brought Bitcoin far from $6,000, a critical bearish trigger.

By Mike McAra via Sunshine Profits 

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