The current behavior and tight range of Bitcoin, Ethereum and Litecoin offers an opportunity for a good lesson. Since the market is continuing to coil, consolidate and be very boring we get this opportunity to review (or learn something new!) the phases of any market.
I want to discuss Dow Theory. Dow Theory is one of the main tenants of technical analysis. Let’s do a quick look at the six main components of Dow Theory.
- The market discounts all instruments.
- The three kinds of market trends.
- Primary trends have three phases.
- Confirmation of other indices.
- Volume confirmation of a trend.
- Until a clear reversal occurs, trends persist.
I want to focus on #2 there, the three kinds of market trends.
The three kinds of Primary Market Trends are:
- Accumulation (Bull Market)
- Public Participation (FOMO/Fear Of Missing Out)
- Distribution (Bear Market)
Accumulation phases are hard to spot. They come at the end of a bear move (distribution) and when price, sentiment and the outlook are all at their worst. On technical patterns, we see consolidation as evidence of accumulation. Consolidation is evidenced by tight ranges of price being traded, very small ups and downs over a period that shows very ‘flat’ movement on a chart. One of the easiest ways to know if the end of a downtrend is over (because consolidation can mean just a pause for further down movement) is if price stops making lower lows and lower highs. Is that happening right now? Let’s look at Bitcoin’s chart.
If we remember that one of the signs of Accumulation is not only a tightening of price, but a stop to lower lows and lower highs, we have certainly met two of those 3 conditions. We are making higher lows, we maybe could consider matching and topping a high of the weekend, but I think we really need to trade and hold above the 12000 value area and finally the 13300 value area for the final nail in our bullish expansion.
Expect prices to continue to consolidate and have very tight ranges before the next move. Expect that move to be big.