Bitcoin is trading around 4200 after it recovered slightly from a new low at 3500. Has Bitcoin bottomed yet? Will there be a complete recovery from here forward?
November 30, 2018 | AtoZ Markets - Picking the top or bottom of a financial instrument is something that most will fail at. The few others that get it right will not be able to maintain the feat consistently. If this is difficult for a regular market, then it should be more for Crypto assets. Crypto assets are largely unregulated, opened to cyber-attacks and liable to manipulations. They are still considered very risky by many investors especially after what has happened so far this year. Though there are fundamental reasons why prices rise and fall but all the activities are weighed and represented on the chart. On the chart, one very useful methodology (if not the best) to help predict long and short term market direction of any asset class traded by a large number of people is the Elliott wave theory.
Basic logic of Elliott wave theory
Markets are driven largely by mass psychology of participants which swings from excessive optimism to pessimism, and back again: This has been found to be true even in Bitcoin. Currently, market is in the pessimistic (bearish) cycle and the swing is expected to turn around back to optimism (as seen in 2017). Same happened in 2011 and 2013-2015.
In the markets, mass psychology are crystallized into repeating patterns seen on the price charts: One undoubted wave/chart pattern that has been very useful in the Crypto market is the 'triangle pattern''. Check the charts- most of the big bullish breakouts in most Cryptos in November/December 2017 bullish run were preceded by bullish triangle patterns. 2018 bearish trend also has a bearish triangle pattern giving a warning that Bitcoin might drop far below $4000. The chart below is still fresh in our memory.
After the first crash to 6000 in early February, Bitcoin quickly made partial recovery to 11800. Since then and for about 9 months, price steadily evolved into this very familiar pattern. Another crash below 6000 was very much expected. Price activities for 9 months completed a bearish triangle pattern. Before the recent fall started, the chart above already gave a clue of where next price was going. Here is the chart after the breakout.
Well, that's how it comes. A drop to 3500. By extension, it's very possible that price would drop further to 2000 or even 1000 as the current pessimism still weighs heavily on Bitcoin and other Cryptos. It must also be noted that on a far less occasion, price can go counter-trend at the end of a triangle pattern.
Human behavior and psychology is repetitive, so are price patterns. Price patterns are repetitive and therefore predictable: The very good thing about these patterns are that they are not a one-off. They are repetitive. They have been for centuries and will continue to be at anytime prices are presented on charts. This makes them predictable. So to a big extent, near-term and long-term future price moves can be predicted. Triangle pattern is just one of the thirteen patterns explained by the Elliott wave theory.
Using Elliott wave theory, has Bitcoin bottomed yet?
Even Elliott wave theory has a limitation. Until a clear price wave pattern is complete, the likelihood is not high. At this present moment, one cannot say confidently that price has bottomed. Often times, after a triangle breakout, price moves in equal measures as the height of the triangle or the size of the trend preceding the triangle. The former is more realistic and it means Bitcoin could drown further to 1000-2000. Of course, if a clear reversal pattern happens before then and price responds, it won't have to go that deep. Since picking the exact bottom is almost impossible to do, how could price move to get out of the bearish zone?
When will Bitcoin bottom?
One way is a very huge spiky move above the upperline of the triangle (above 7000). Aside this, price can gradually mount a bullish trend if it has really bottomed at 3500. As the chart below shows, the breakout from the triangle completed an impulse wave. Impulse wave is one of Elliott wave reversal patterns. The next thing that should follow is another impulse wave bullish trend up to 6500-7000 as the chart below shows. Often times, that's how price ends a particular trend or correction. It responds with a motive wave (impulse wave most especially).
If this should happen, then the second stage of early recovery is completed. Price might want to retest the bullish resolve by a corrective dip. The dip must however be limited above 3500. At the end of the corrective dip, a fast bullish breakout should follow above the previous high. At this point the final stage of the early bullish recovery is completed. The bulls can build on this and return Bitcoin to the pessimistic phase. If the current bounce lacks a real push and price stays below 5500, a new low will most likely happen as shown by the chart below.
From 3500, price might just be making a correction of the 6550-3500 dip. The current bullish correction might last to 4600-5400 before price continues downside and breaks below 3500 on its way to 1000-2000. Until price responds well, 3500 might not just be the bottom yet.
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