Update on Bitcoin's Log Harmonic XABCD Butterfly
Background
On May 1 Bitcoin had shot up to the 1.618 extension of XA and stalled there for a while and I posted my first log butterfly idea, which will be in the lined idea below. I was one of the first and few people warning that this price action was at a major target and we should be expecting a retrace. As part of my disaster scenario and personal development I checked the price action for harmonic patterns and I found that the fib levels matched a harmonic butterfly, but only on the log scale.
Since then we can see strong profit taking above the 1.618 level with only a hint of a monthly candle body above the level. Now the price action stalling at $69,000 is mildly amusing, much like the SPX bottoming out in 2008 at $666, making you wonder just how juvenile the financial whales really are. Still, since there was a slightly higher high I have moved point D appropriately and therefor point E is a tad higher than in my original post.
Technical Analysis
As it seems we have a double top the log Harmonic Butterfly appears to remain valid. We remain part way through the month of December but I don't see much changing with the bearishness I see in the chart, or globally with the financial system.
The image below shows your standard indicator set up for the MACD and RSI with some basic charting. I remember in 2018 we had a descending triangle and all the bulls saying we would get a cup and handle or a saucer formation. I was new to trading and got caught up in the hype myself. Those bullish formations? Didn't happen. Now we have an apparent double top at this major fib target. When we look for the indicators for some clarity we see a lot of bearishness to back up the bearish chart formation. I wrote down the full divergence primer just for the sake of being thorough, but we only really need the normal bearish divergence.
Normal Divergence (Trend Reversal)
Bearish: Higher Highs on the price action but lower lows on a indicator
Bullish: Lower lows on price action but higher lows on the indicator
Hidden Divergence (Trend Continuation)
Bearish: Lower high on the price action but a higher high on the indicator
Bullish: Higher High on the price action but a lower high on the indicator
The RSI and On Balance Volume both have normal divergence, with a higher high on the price action but a lower high on the indicator. With an asset like bitcoin which has been continually printing new coins for its whole existence the fact that we have lower OBV now is curious. The RSI divergence shown in purple from peak to peak suggest that we are more than likely going to see more downside leading to a MACD cross. I have been watching for that for a while. I remember when I was calling for a weekly MACD cross and people told me that wasn't going to happen. But guess what, it did. The OBV slipping the 10 is a very serious sign that buying has dropped off. It seems that we will have a very high chance the OBV will slip the 20 EMA as well. Historically when the OBV has been below the 20 on the mouthy it has been a great place to invest in crypto.
Fundamental Analysis
Two main driving assumptions behind this post is the idea that interest rates are going to go up at the same time DXY is going up as well. Why? The Federal Funds rate is in a massive long term falling wedge. If you don't view it on the monthly time frame or higher you can get some weird quirks in the data. What does this mean? It means that the rate that banks charge one another for overnight loans is going to go up. That means that broadly, all interest rates on dollar denominated debt is going to go up as well. Bitcoin by itself doesn't have any yield. It isn't going to be as relatively attractive in that environment as something giving you a coupon or a dividend or an interest payment. How the de-fi space will adapt to these increasing rates will be interesting. How people will assess risk with interest rates moving vis-a-vis bitcoin and crypto in general will also be very interesting.
Likewise the Dollar is in a massive long term falling wedge. I found this wedge by putting the data on log scale, and now I see a few key analysis doing the same (after I twitted at them a couple of times). The Dollar is going to pump along with interest rates, the same way that can see happened in the late 70s and early 80s. I haven't shown it, but going into the peak of DXY and the Federal funds silver had just done a blow off top and entered a historic bear market. Equities were broadly flat until the Federal Funds rate began to decline and then things began to pump. Perhaps crypto is topping prior to the dxy and fed funds rate just like silver did. Another thing to watch is the velocity of money. The money supply is at an all time high and any small movements upward in the velocity of money is going to make anything you need very expensive, which probably isn't a good thing for intangible assets like crypto.
A quick look at my alternative bearish scenario
Quite Simply, the Monthly Keltner channel will provide support for monthly candle bodies it has done so far. The 200 week SMA has also done a very good job at providing support till now. Investing when the Stoch is so low has historically also been a great decision. If the monthly Keltner and 200w continue to hold then of course my idea is negated.
On May 1 Bitcoin had shot up to the 1.618 extension of XA and stalled there for a while and I posted my first log butterfly idea, which will be in the lined idea below. I was one of the first and few people warning that this price action was at a major target and we should be expecting a retrace. As part of my disaster scenario and personal development I checked the price action for harmonic patterns and I found that the fib levels matched a harmonic butterfly, but only on the log scale.
Since then we can see strong profit taking above the 1.618 level with only a hint of a monthly candle body above the level. Now the price action stalling at $69,000 is mildly amusing, much like the SPX bottoming out in 2008 at $666, making you wonder just how juvenile the financial whales really are. Still, since there was a slightly higher high I have moved point D appropriately and therefor point E is a tad higher than in my original post.
Technical Analysis
As it seems we have a double top the log Harmonic Butterfly appears to remain valid. We remain part way through the month of December but I don't see much changing with the bearishness I see in the chart, or globally with the financial system.
The image below shows your standard indicator set up for the MACD and RSI with some basic charting. I remember in 2018 we had a descending triangle and all the bulls saying we would get a cup and handle or a saucer formation. I was new to trading and got caught up in the hype myself. Those bullish formations? Didn't happen. Now we have an apparent double top at this major fib target. When we look for the indicators for some clarity we see a lot of bearishness to back up the bearish chart formation. I wrote down the full divergence primer just for the sake of being thorough, but we only really need the normal bearish divergence.
Normal Divergence (Trend Reversal)
Bearish: Higher Highs on the price action but lower lows on a indicator
Bullish: Lower lows on price action but higher lows on the indicator
Hidden Divergence (Trend Continuation)
Bearish: Lower high on the price action but a higher high on the indicator
Bullish: Higher High on the price action but a lower high on the indicator
The RSI and On Balance Volume both have normal divergence, with a higher high on the price action but a lower high on the indicator. With an asset like bitcoin which has been continually printing new coins for its whole existence the fact that we have lower OBV now is curious. The RSI divergence shown in purple from peak to peak suggest that we are more than likely going to see more downside leading to a MACD cross. I have been watching for that for a while. I remember when I was calling for a weekly MACD cross and people told me that wasn't going to happen. But guess what, it did. The OBV slipping the 10 is a very serious sign that buying has dropped off. It seems that we will have a very high chance the OBV will slip the 20 EMA as well. Historically when the OBV has been below the 20 on the mouthy it has been a great place to invest in crypto.
Fundamental Analysis
Two main driving assumptions behind this post is the idea that interest rates are going to go up at the same time DXY is going up as well. Why? The Federal Funds rate is in a massive long term falling wedge. If you don't view it on the monthly time frame or higher you can get some weird quirks in the data. What does this mean? It means that the rate that banks charge one another for overnight loans is going to go up. That means that broadly, all interest rates on dollar denominated debt is going to go up as well. Bitcoin by itself doesn't have any yield. It isn't going to be as relatively attractive in that environment as something giving you a coupon or a dividend or an interest payment. How the de-fi space will adapt to these increasing rates will be interesting. How people will assess risk with interest rates moving vis-a-vis bitcoin and crypto in general will also be very interesting.
Likewise the Dollar is in a massive long term falling wedge. I found this wedge by putting the data on log scale, and now I see a few key analysis doing the same (after I twitted at them a couple of times). The Dollar is going to pump along with interest rates, the same way that can see happened in the late 70s and early 80s. I haven't shown it, but going into the peak of DXY and the Federal funds silver had just done a blow off top and entered a historic bear market. Equities were broadly flat until the Federal Funds rate began to decline and then things began to pump. Perhaps crypto is topping prior to the dxy and fed funds rate just like silver did. Another thing to watch is the velocity of money. The money supply is at an all time high and any small movements upward in the velocity of money is going to make anything you need very expensive, which probably isn't a good thing for intangible assets like crypto.
A quick look at my alternative bearish scenario
Quite Simply, the Monthly Keltner channel will provide support for monthly candle bodies it has done so far. The 200 week SMA has also done a very good job at providing support till now. Investing when the Stoch is so low has historically also been a great decision. If the monthly Keltner and 200w continue to hold then of course my idea is negated.
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