It's been a little while since we've had a chance to look at the price trajectory of Bitcoin. Ever since the implosion of FTX & Alameda, the markets were thrown in a flux, so we absconded from our charting duties for a little while.
But now that the markets are back, we're going to make sure that we capture every single opportunity out there so that we miss nothing on the price action's ascent from this point going forward.
Taking a Look at How We Forecasted Bitcoin Previously
Below is a look at how we forecasted Bitcoin's price action before the SBF debacle:
As we can see, we were expecting Bitcoin to at least touch the overhead horizontal resistance at $22.3k. However, that did not happen, as the price fell sharply downward after the news of FTX's bankruptcy shocked the entire cryptocurrency space.
That event marked the 3rd black swan in just 2.5 years. Those events are:
Global Pandemic / Stock Market Crash in March 2020
Terra Ecosystem Collapse in May 2022
FTX + Alameda Collapse
Despite these setbacks (and the fact that two of them came in the space of 6 months), the price of Bitcoin never dipped much further south than $16k.
One could consider those two touches to be indicative of a 'double bottom' (the chart pattern looks like a 'W').
This would be a fair assessment to make since these two touches followed a long-term downtrend in price.
Here are a few examples of what the chart formation looks like:
https://school.stockcharts.com/doku.php?id=chart_analysis:chart_patterns:double_bottom_reversal
Since then, we've seen the price action break through the former horizontal overhead resistance at $17.2k a few days ago on January 9th, 2023.
Since then, the price has been on a near-vertical trajectory, smashing through one of the overhead horizontal resistance points that we outlined at the $18.8k-19k mark.
This breakout was fueled by a 15%+ price burst over the past three days from the time of writing.
This is especially remarkable when considering how little volatility was expressed in the price action.
Where is Bitcoin's Price Going From Here?
Now that we're all caught up on what happened, let's see if we can't track down where the price of Bitcoin is going from here.
In order to create this forecast, we're going to start by looking at the next resistance point ahead for the price.
Resistance Doesn't Mean Guaranteed Stop
As we noted prior, Bitcoin's price blew through two overhead horizontal resistance points as if they weren't even there. And when we look at the current price action for Bitcoin on the daily resolution, it doesn't appear as though this overhead resistance point will serve as a significant impediment to price action going forward.
Momentum Indicators for Bitcoin
For those that don't know, there are two different types of technical indicators that can be applied to any chart's price action in order to gather information for forecasts or understanding about how the price got to where it was at a given point in time.
The other two types of indicators are referred to as 'lagging' and 'coincident'; the latter is rarely used, but we'll get into that later as needed
Each momentum indicator we'll take a look at here is a custom indicator coded by Librehash and disseminated with members of the Discord (sometimes access is given for free if you're in the Telegram at the right time)
Librehash Balance of Power RSI
Brief Review:
This indicator is built from the Balance of Power
We take the values of the Balance of Power, then apply the RSI extraction to it (14 periods)
From there, we smoothed the values over with the Exponential Moving Average (EMA; 9 Periods)
Then I threw on an ob/os (overbought / oversold) overlay on the chart, coded in the math logic to bound the range (similar to how RSI has a top range of 100 and lower bound of 0)
Took the average of the values over a certain period of time (manually; not via code), then calculated one standard deviation above and below that average to create the ob/os zones for the indicator
Added in logic to color the indicator red every time a period ends with the BoP RSI beyond the ob/os range to show an "extreme" in the buy/sell pressure
Main Purpose: To detect buy & sell pressure (very accurately)
Below, is a look at what the BoP RSI is showing us on the daily resolution for Bitcoin:
As we can see the BoP RSI reading is well above and beyond the RSI-like overlay, which means that the buy pressure is in the extreme range.
Does This Mean That the Price is Guaranteed to Decrease From Here?
No, not by any means. There are many traders that have the mistaken belief that when an oscillator shows measurements outside of the norms reflected by a bounded range (like the purple overlay we see in the chart above), that a reversal is bound to occur due to some sort of invisible market force that seeks 'equilibrium' above all.
However, that is not true. While the indicator itself will likely return within the bounded RSI overlay range, that doesn't mean that the price will follow suit. Sometimes a cooldown in the indicator only means a reduction in the price's momentum (which is expected since this current rate of change in the price is unsustainable), not necessarily that the price will depreciate.
With that being said, let's see what the other indicators are showing us.
Librehash RSI(14)
This is another custom indicator, just like the one before it. This is read just like the regular RSI(14). The only difference here is that the indicator itself (line) changes colors on the basis of whether the exponential moving average of the rate of change of the RSI(14) has surpassed/fell below a slower exponential moving average of the rate of change (if that's confusing, go ahead and check out how the indicator is defined on TradingView underneath the 'librehash' profile).
Like the Balance of Power RSI, we can see that the RSI(14) has reached far into the OB (overbought) zone.
The same can be ascertained of the Volatility RSI as well.
Bitcoin on the Weekly Resolution
Since we want to get a better gauge for what Bitcoin will do in the long term, we're going to go ahead and shift over to the weekly resolution to see how the indicators are measuring Bitcoin's price action.
Second Look at the Librehash RSI(14)
As we can see, the RSI(14) has only recently flipped to 'green', indicating that the current rate of change in the price's momentum has begun to pick up (the indicator is coded to help detect true changes in the price action rather than getting caught in the mix by intermittent whipsaw action).
There's obviously plenty of room for the RSI(14) to grow from where we're at on the weekly resolution, as the indicator is far below even coming close to breaching the 'overbought' range. Some technical analysis theory suggests that the RSI(14) does not dictate a true change in price momentum until it crosses above/below a reading of '50'.
At the time of writing, its currently at 47.58 on our RSI(14).
Let's take another look at Bitcoin so we can assess the last time it's given us this measurement on the weekly resolution.
Taking another look at the RSI(14), we can see that it has increased steadily from June 2022 to the present (>6 months).
There have, of course, been periods when the RSI(14) dipped substantially. But overall, the RSI(14) has trended positively from June 2022 to where we are at present. This is notable because Bitcoin has not experienced a stretch of positive RSI(14) movement since March 2020 (following the first black swan we discussed above).
Of course, we know what happened to Bitcoin's price trajectory from that point.
As we can see, the price of Bitcoin increased by >1100% from that point going forward.
What's different about this time, however, is that the RSI(14) has shown significant positive divergence over these past 6 months (this was not the case during the March 2020 pivot).
What Does Positive Divergence Mean for the RSI?
A lot in our case. To refresh ourselves, let's take a brief look at Investopedia's definition of 'divergence' within the context of technical analysis.
As shown above, Investopedia accurately indicates that there is 'positive and negative divergence' and that, "positive divergence indicates a move higher in the price of the asset is possible".
In this case, we are indeed seeing positive divergence since the oscillator/indicator has trended upward as the price has declined.
When such divergence occurs on the weekly resolution, we should take it seriously. The larger the time frame, the more substantial the forecast as it pertains to the price trajectory going forward.
Risk/Reward Target
For this forecast, we're going to use the EMA indicators to give us a sense for where we should expect any notable resistance for the price moving forward.
To do so, we plotted the EMA 12,26,50,100 & 200. Currently, the price has surpassed the EMA-12 (purple). It appears it'll blast through the EMA-26. Beyond that, the EMA-50 (gold) is hanging out at around $25k.
So we're going to plot that as our target for our R/R. We'll plot $18.8k as our stop-out point since such a decline would warrant a strong reconsideration of our position.
That's a potential +27.74% reward, with a risk of approximately -5% from where we're at currently. We can live with that R/R for sure (always risk management!)
If we get stopped out, we'll just manage our position from there and decide whether we're going to elect to re-enter or not.