Quote from: ATC777 on March 25, 2013, 02:14:21 AM

Hey guys,

As I promised some time ago I am back to do more in-depth technical analysis of the BTC/USD rate. I'd hoped to do this again much sooner, but unforeseen circumstances (e.g., nasty car accident, numerous doctors appointments) forced me to put it on hold. But it's time for my next analysis, which probably couldn't come at a more interesting time! Cheesy

To begin, I'd let's go over a few things before we dig into the charts. Many of remember that not so long ago you could buy a bitcoin for $12 and some change. And how about today (3/24/13)? Try a whopping $71.50! ... say what?! Shocked

As with all things, we have to ask ourselves what fundamental changes have occurred in the market to drive prices to these unparalleled all-time highs. This "super-rally" took place in two distinct legs. The first leg-up of this massive super-rally took us from the $10-$12 level to the high 40s and low 50s. As I was at the time, I'm still skeptical that there was any strong fundamental factors behind that massive climb. What changed? Did we gain some new users? Yes, we did. But we did not quadruple (or even double) our user-base, so it cannot be explained by an influx of new users. So what was it? Dominos pizza? Several people told me that... but Dominos did NOT start accepting bitcoin (it's merely a third party service that orders a pizza for you if you pay them BTC). While that's definitely cool, and a small victory for Bitcoin, it's not the fundamental factor we're looking for. The most plausible explanation is that European financial woes and fear about the integrity of the banking system caused a lot more interest in bitcoin (which is true). However, it certainly wasn't enough to support a $50+ rate for our budding crypto-currency. The "math" simply doesn't work out... So it leaves us with one thing: speculation.

It seems that excitement and the general happy-go-lucky attitude of the bitcoin community is the missing "fundamental" factor we're looking for, and our big swing in price is the result of a massive influx of speculative money. These things are self-feeding... the price moves up a nice bit, you hear some good stuff in the news, you might even have gotten one of those Dominos pizzas (lol), and then you and your buddies putting your whole $350 in savings into bitcoin to join the speculative wave. That moves the price up a bit more, and people chase it -- adding more and more money into it. To an experienced day trader or a Wall Street shark, the average Bitcoin user is what we call "financially unsophisticated"... most of the market is made up of Silk Road-using teenagers, amateur speculators and amateur traders, computer geek college students and the likes... people who've never traded a share of stock, don't know what a "calender spread" or an "Iron Condor" is and have no clue how the futures market works (or in most cases what it even is). When such people see the price of something going up, they leap to the assumption that it will keep going up... perhaps forever? That's what happened in the DotCom bubble, as amateur day traders and novice speculators poured tons of money into budding tech stocks (only to be utterly destroyed). About a week ago, I asked a bitcoin trader what fundamental factors he thought was driving the market higher. His response: "Well... Bitcoin has been mentioned in the news a whole bunch lately!" And it seems he's not alone in his failure to distinguish a news headline from fundamentals... Undecided

We have seen patterns such as this before... we saw it in the aforementioned "DotBomb"... we saw it before the real estate / MBS meltdown of 2008... and of course, we cannot forget the tulip mania of 17th century Holland. Anyone even moderately experienced with financial markets understands the concept of bubbles. And when I look at this I cannot help but notice the striking similarities between past bubbles and the precariously high price of Bitcoin. But it did not stop at $50. The crisis in Cyprus, news headlines and a myriad of rather trivial factors triggered yet another influx of speculative money driving the price yet another 50% higher. Not even the recent fork in the blockchain (which highlighted how delicate this thing can be) was enough to dissuade the crowd from dumping their savings into the mix. And when the pigs beg to be slaughtered, savvy traders are smart enough to capitalize upon the ignorance of the masses -- thus their money is added to the equation and drive prices even higher... Bubbles operate largely upon the "snowball effect" as greed rolls it up the hillside. In my last analysis I was hoping for a correction that would settle things down and give us time to catch our breath. But I still felt uncertain. I left myself room for the market blasting off like a rocket, and I'm glad I did. But this time I'm thrice as skeptical and have officially begun preparing for a big move to the downside. So let's have a look at those charts...

I've numbered my scribblings on the chart to provide some commentary...

1) Double-top Pattern (drawn in blue)

These things are always scary... Sometimes they fake us out, but a double-top is generally a very strong bearish indicator. A double-top tends to occur at the end of a large rally. The market becomes over-bought, and finally tips over as people begin selling. But just as the selling gets heated people decide to jump back in, hoping that the rally will continue. When it doesn't, and fails to break through the former resistance level, everyone begins jumping ship and it plummets. In my day trading experience I've found these things to be good indicators. The double-top pattern was what gave me the signal to sell all my gold and silver futures, mining stocks and physical bullion just under $50/oz for silver. And it has served me well on countless stocks and a myriad of smaller intra-day and swing trades.

2) Current resistance

The red line indicates the current resistance level. Lo and behold, we raced back towards that level and failed to punch through. For this rally to continue we will need to see a very strong break-out above the resistance level with heavy volume. And we're not seeing it. In fact, it looks like the rate is falling as I type.

3) Old support level

The green line is the old support level after the first leg-up of the rally. When major sell-offs occur you can usually expect some support to bunch up around the former support level, and I expect that if we see the market topple and plunge back toward the 50s. This line indicates nothing in and of itself, but I'm pointing it out so you will pay attention to it if/when the sell-off gets hot and heavy.

4) MACD

MACD (moving average convergence/divergence) is one of my favorite indicators. Right now, good ol' MACD is telling us that momentum is stalling. We failed (so far) to set a new high both in price and MACD. And I've highlighted the MACD resistance level with the red line. We've been over-extended and over-bought for quite some time, and in my own experience I've found that MACD wins the tug-of-war 9 times out of 10 (hence the reason I'm willing to risk my money on it). The shrinking of the green histogram also indicates stalling momentum, and our short-term MA is beginning to slope downward -- thus making the signal more bearish. I am currently watching for a cross in the MAs, and for both to fall below the signal line (zero).

5) Stochastics

Our stochastics are also pointing towards the over-bought condition. It's all been BUY BUY BUY for weeks on end, and this tells the tale of the weakening money-flow. If you take a look at how the stochastics correspond to previous rallies and sell-offs, you can see just how useful this indicator can be. And right now it's screaming "DONT BUY! DONT BUY! DONT BUY!".

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CONCLUSION ::
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Last time I was uncertain about what was to come... but this time I'm going to go out on a limb and make you a clear-cut suggestion: sell. I'm selling. We've all made a lot of money, and no one has ever been hurt taking a profit. Profit is money you didn't have before, and now you have it. So take it off the table and enjoy it. You can stay in the shark pool if you want, but do so at your own peril. It looks like the correction is indeed very close -- no one has infinite money to keep pushing the price to infinity, so a correction is going to happen. If you're patient and smart, you might be able to buy back your bitcoins in the $30s or $40s in another 7-14 days.... or at least in the 50s. So I think the smartest move you can make is to de-risk and go have some fun with your not-so-hard-earned money. :-)

However, there's another scenario which might take place. It might be that there's still enough money on the sidelines to drive this higher. If that is indeed the case, we're probably going to see the alternative crash scenario play out. The final "oomph!" before the blowout. Much like silver's huge over-night jump before the 2011 correction, we might see bitcoin tack on another +$25 and reach for the $100 mark (a key psychological level). If it plays out this way, the following crash will be much worse and longer-lasting than if it just goes ahead and corrects here. The reason is because a LOT more people will get burned a LOT worse and lose a LOT more money. So it will scare off a lot of newbies and people will be scared to re-enter the market for some time. So I hope it doesn't pan out this way.

In any case, I raise my cup to a bitcoin correction. I'm optimistic about the long-term future of bitcoin, but we're way over-extended (and way over-due) for a considerable correction. We need one to settle things down and give our great crypto-currency a chance to truly grow. So have fun, and good luck no matter what the outcome!

Regards,

--ATC--

NOTE ::

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even your red trendline was constructed wrongly. it was already broken when you drew it.