A Technical Analysis of Bitcoin
Quick Take:
Market Sentiment data shows investors have more pessimistic outlooks for Bitcoin price in Q4 when compared to the same stage in Q3
A significant depreciation recorded on the 24th of September resulted in bitcoin price dropping below several key levels, the 200 daily SMA chief among them
As Q4 progresses, bitcoin price prospects are significantly less optimistic than they were at this stage of Q3. In the first month of Q3, many market participants held outlooks that bitcoin price would continue to retest Q2 highs near $14,000. This outlook was given further strength as price appreciated early in July.
Currently, the sharp depreciation observed at the end of Q3 is still fresh in investors minds and there is much more uncertainty regarding bitcoin price prospects. While many are anticipating appreciation over the next two quarters as Bitcoin approaches its next halving, price action has been weak and market sentiment data has been poor.
The Crypto Greed & Fear index, a metric which compiles data from numerous sources to gauge investor sentiment regarding bitcoin price prospects, reflects the greater uncertainty at the start of this quarter. For the first fourteen days of Q3, the index traded in a range of 33 to 84 with a mean value of 67.92. In the first fourteen days of this quarter, the index traded in a range of 27 to 41 with a mean value of 35.92.
Technical Analysis of Bitcoin Price Performance
Bitcoin price went through a long period of consolidation in Q3. The prevailing narrative during this period, evident from social media and analyst outlooks, was an expectation that price would break from the consolidation pattern with a significant move to the upside.
Such an upside move did not materialize and bitcoin price recorded a depreciation of 11.9% on the 24th of September ending its period of consolidation. The 20-week SMA acted as a support level before the breakdown.
The leg lower brought bitcoin price below several other important levels in addition to the 20 WMA.The weekly candle closed significantly below the $10,000 level, the 38.2% Fibonacci retracement level, and a support level at $9,351. While price currently remains significantly below all these levels, these can all be monitored for potential resistance in the case that bitcoin price appreciates.
The drop below the 38.2% Fibonacci retracement level may also suggest that the long-term downtrend which started in December 2017 is not yet over and we may see price return to prices below those observed in December 2018. However, we are attachinga low probability to such a scenario for reasons which based on the mining cost of production theory detailed in a below section.
The low of the significant drop on the weekly candle can also be monitored as an important area of support. $7,736 corresponded closely with the lows of the following two weeks. Furthermore, this level also corresponds with the weekly 100 SMA which many analysts are currently monitoring. A close below this level on the weekly candle would likely catalyse significant selling pressure. The leg lower also brought the price of bitcoin below several important levels on the daily chart.
The move to the downside brought the price below the daily 200 SMA, an indicator which is commonly used to gauge the long-term trend direction. The drop below this indicator and the failure to rise above severaltests increases the likelihood that we will observe further movement to the downside in the medium term timeframe (1 week to 3 months).
The 50 daily SMA is also trending downwards towards the 200 SMA, approaching a highly monitored pattern known as the “death cross”. This pattern is so widely monitored that it holds little predictive power but may result in some short-term volatility if it forms.
The on-balance volume indicator is an indicator which illustrates the cumulative effect of volume. It can be an extremely effective indicator for gauging whether the market is in phases of accumulation or distribution.The indicator recently dropped below its 30-day low but has since moved back above and also exited a downward trend which the indicator has been trading in. A move to new lows for this indicator should be monitored and may precede a significant move to the downside as it would suggest sellers are eating buyer liquidity.
Prevailing Market Theories
In this section, we briefly cover some of the popular market theories surrounding long-term price direction.
Upcoming Halving
There is a high expectation from analysts that price will rise significantly over Q4 2019 and Q1 2020 as the market prices in the Bitcoin halving. As was evident with the significant price drop on September 24th,markets can often do the opposite of what most market participants are expecting. Taking this into account, it should be considered that there is the possibility that price may continue to consolidate or depreciate leading up to and beyond the 2020 halving.
Mining Cost of Production
One theory proposed by analyst Filb Filb is that Bitcoin could find a new bottom near the mining cost of production. Although different miners have varying costs of productions, the dominant amount of miners are located in China and it is acceptable to propose that the average mining cost of productions is far below current prices. It could roughly be estimated to be in the range of $3,500 to $6,500 based on research from CoinShares. If this theory holds, we may see further downside action in the coming weeks and months.
Bitcoin Moving Forward
As Q4 progresses, we will be monitoring both the key levels identified in this article along with how they interact with prevailing market theories. We will always be highly alert that the popular outlook held by market participants can be the incorrect one, as was demonstrated with the significant drops on the 24th of September.
Currently, we are wary of more downside price movements in the medium timeframe but we could also see upward price movement in the near-term with another possible test of the 200 SMA. We will adjust our outlooks accordingly to how market conditions develop.