It has not taken an expert market analyst to see that Bitcoin has been in a bubble for quite some time. If you remember the five phases of a bubble: Displacement, Boom, Euphoria, Profit Taking and finally, Panic. We look to be mostly in the Profit Taking phase. There been a myriad of warning signs for a pull back with significant divergences in price, momentum and time. Let’s take an objective look at BTCUSD on the 8-hour chart. Please reference the numbers on the chart to the numbers below.

btcusd analysis

BTC/USD Analysis

  1. We have just one example of some clear divergence here. But what is interesting is the mixed divergence signal. We have powerful confirmation of regular bearish divergence with the higher highs in price and the lower highs in the oscillator. But we also have some hidden bullish divergence with those higher lows in price and lower lows in the oscillator.
  2. This is one of the most powerful examples of regular bearish divergence we have seen since the Euphoria phase began. Extremely steep price increase with an equally dramatic series of lower highs in the oscillator are powerful signals to short. But look at what volume has been doing at those top levels on number 3.
  3. This is a textbook indication of profit taking and distribution by experience traders and large institutions. There has not been significant response on buyers to push back up at these prices, and this is very evident with number 4.
  4. VAP (Volume-At-Price Analysis) shows volume decreasing as price is increasing. However, the support line at 5634 is also on top of a high-volume node. If price does return to test this area, expect some ranging activity as this is has been an area of higher than normal participation.
  5. These volume levels are fairly empty. There is a vacuum here. If price were to break below the 5634 line and hold, there would be considerable whipsaws to the downside as price is looking to fill that vacuum.
  6. Price is currently in the highlighted box. Watch how price reacts on the next test of the middle MA of the Bollinger Bands. On the 8-hour chart it has been rejected 3 times so far, with one failed attempt higher.

Reasons for a Bullish Bias – It is very difficult to remain bullish at these levels, especially considering the extreme divergences and volume price discrepancies. However, this entire period could just be a consolidation zone forming for another push up. Just remember what John Maynard Keynes said: “The markets can remain irrational longer than you can remain solvent.”

Reasons for a Bearish Bias – The most obvious bias here is the bearish bias. If we are indeed in a profit taking phase (which can be quantified by the higher selling volume and absorption of buyers) then we need to look out for the panic phase. A break of the 5500 area would certainly trigger a big push south. Additionally, we are quite a distance above the VPOC (Volume Point Of Control) at 4300. 4300 would be the next important area of support. Watch for continued Bollinger Band squeezes before big pushes to the downside.

Important technicals to watch for:

  • Pay very close attention to the volume bars on longer time frames. If we see continued above average selling volume, especially if the volume bars around it are not ascending or descending in an even manner, this is a strong signal of profit taking and distribution.
  • At the time of writing this, the 6600 area has been struggling to gain more momentum to the upside, the volume has been anemic compared to previous time volume bars. This should tell us that the initial bounce off the 5634 support line (Number 6) is a classic dead cat bounce. The volume on the bounce has been decreasing the higher it goes.
  • Whatever oscillator you are using (RSI, MACD, WaveTrend, etc) make sure you pay special attention to what the levels of your oscillator are at when spotting divergences, especially if price is near a support or resistance area.
  • The DeMarker oscillator is still showing us being in a pretty heavy oversold area. A bounce of the oscillator to at least the .5 area statistically should be a resistance area if we are to begin a true downtrend.
  • This entire move down could just be a pullback! There is plenty of fundamental data to support higher prices. Additionally, historical price action continues to display very responsive buying even with technically weak buying signals. We are still in an uptrend, so the rules still apply: don’t short trending up markets.
  • Watch for a break of the 20 MA/Bollinger Band middle line. If it begins to flatten out and not have much of a direction, we are beginning some consolidation and lower volatility. Be careful of those Bollinger squeezes at these historic levels. An expansion of the Bollinger Bands in either direction has a very high probability of continuing in that direction, especially if the VAP above is opposing volume: i.e., if most of the volume at the level is bullish, but the breakout from that level on a Bollinger Band squeeze is to the downside, expect more selling from trapped and anxious longs.