Breaking down Bitcoin's correction & my trades
Updated
Right now is undoubtedly a time when Bitcoin enthusiasts & investors are glued to what the price is doing. I see all kinds of analysis, predictions (different from analysis), fund managers tweeting horrible looking technical analysis with a MACD and a few unconfirmed trend lines, drive by media reports from their “experts” and so on. To be honest, we are at a point as of this writing that has neither invalidated nor confirmed any kind of directional bias.
As I’ve mentioned on twitter, I am not in any trades currently, and for a reason. The question for me then becomes, what scenarios am I looking at? where are my trades going to take place looking forward? what validates what? To do that, I first need to get a handle on what has happened, & what validates a trade for me.
Corrective
So far the only confirmation of any kind of correction being over is the 3-3-5 structure that ended at 9049. The yellow box is currently unknown.
That corrective structure corrected the final leg (5th) of our rally by hitting a common Fibonacci retrace area (first image below). Looking at the overall rally (second image), we haven’t even come close to correcting any of the common retrace points. At minimum I want to see the .382 fib level hit. More commonly would be the .618, that being said the market doesn’t HAVE to do anything.
Taking this overall picture, I now look at what has happened in our unknown area in the yellow box above. Coming out of the final 5 leg drive and painting a swing low we see a bullish OBV divergence (first image below). Taking it down to a lower time frame to study the rally up, we see the same div but no real significant spike in cumulative volume (second image). This tells me the rally was correcting oversold conditions & not a true impulsive structure that identifies the bottom of our correction.
Taking this information I now want to look at the possibilities of what this is. Seeing a potential 5 impulse structure upwards with weak volume leaves a couple scenarios. At the end of this I will get into my trades and how I play each scenario.
Scenarios
Scenario 1: This structure is not impulsive looking at this time frame & actually a 3 drive with some long wickage throwing off the visuals of the structure. Really the structure is better viewed on the hourly and every fib level hit perfectly for a 5 impulse structure, but I omitted that for an overall scenario analysis. Looking at the fib retrace point to identify this possibility, I see it hit the .5 fib mark but fell short of a common .618 correction.
If this scenario is true, then we should see a break of the low at any time leading to a violent drop to the 1.23 level at 8402 which is the maximum of a 3-3-5.
However, this scenario now doesn’t make sense, remember we made 2 sets of ABC corrective moves to begin the correction, corrective patterns that start with a 3-3 end with a 5 unless it is a triangle. If the drop from 13222 to 9049 was wave 1, and this rally from the low was a corrective 2, then this is wave 3 and its minimum end point in a falling 3 is the 1.23 fib extension of 1. That would take us to minimum 6989 invalidating the maximum of 8402 in the 3-3-5. Again, markets don’t have to do anything, but technical analysis helps with deductive reasoning.
Scenario 2: Since the above scenario doesn’t make much sense, we look at what the targets would be if the 5 impulse structure coming out of the low was an A drive. This correction currently is a B, and our targets are derived from the AB for the C. If this scenario is true, then we can confirm the larger corrective pattern at the end of C. I’ll get into what that is at the end of this scenario.
The A wave commonly hits the .5 fib level of the prior trend, as I noted above, it did. Corrective wave B (our current structure) should be attempting to find a bottom. It has been hovering around the .764 & .854 fib level, these are common points. However in a flat ABC this can be up to 100%. There I have my invalidation point which also confirms funky scenario 1 by breaking the low.
Taking this into account, we would make a five impulse structure up to either the .618 (minimum), the 1, and lastly the 1.23 fib level. Invalidation would be at the 1.618 in pink which confirms the bottom of the prior structure (we will get into that in scenario 3). Since the deep retrace level of this B (if we count the wick) then this looks more likely to hit the minimum .618 or 1 fib level.
Scenario 2 is actually a big scenario since we are actually confirming a larger corrective pattern called a double combination. We confirmed the larger ABC talked about in the beginning, this corrective ABC we are forming would be the X of a WXY and the first correction is labeled as W.
To confirm it as an X in a double corrective combination we need to see a swing high printed on the Daily of at least the .5 fib or any of the yellow fib lines below. Now I begin to see some collusion in this analysis, it so happens that the 1 fib of the C is actually at the .5 minimum of the W move.
If this is the case, then at that confirmed swing high of the ABC, we take the fib extension and target 61.8%, 100%, or 123.6% of wave W to find our bottom. To speculate on where the bottom would be in this scenario, I have placed the end of X (speculation until a confirmed swing high) at that .5 of the yellow fib. We now can see some potential targets for the bottom that can be refined as the correction happens to a more exact point.
Scenario 3: This scenario is bullish overall and that confirmed 3-3-5 ABC mentioned at the beginning was the bottom. Likelihood of this doesn’t seem high as we have issues with volume and overall structure but let’s look from an analysis point of view and identify the confirmation.
Going back to the pink line I mentioned in the third paragraph of the last scenario, the pink 1.618 in the image below identifies this rally as a 3rd impulse considering we made a sub 5 in the potential A coming out of the bottom. It’s pretty simple to identify when it happens: If the daily continues upward without making a confirmed swing high to reach that target, then we have a confirmed bottom and the corrective A that I discussed in scenario two becomes a impulse 1.
Conclusion & Trade Strategy
So yes I get it, using Elliot Wave theory leaves open a lot of possibilities. I applied this as a means to make sense of the market, I still use Ichimoku, the ALPHA indicators and volume analysis when basing my trades, this correction requires additional detail which is what I have done. Also, the fib extensions in scenario 2 & 3 could adjust slightly if we break 9111, this is assuming that is the bottom in scenario 2 & 3 since there is not much wiggle room till invalidation from that low. On to my strategy…
If scenario 1 confirms by breaking the low, then I open a market short on the break with a stop at 11120. At this point I feel something is wrong with the overall market & not operating normally. I am ok with a market order as a hedge there; Take profit and management will be done after. However, after doing this analysis I find this unlikely because of the invalidation that is detailed in that scenario. Either way, perhaps I have made a mistake somewhere along the line, if it takes place I’ll be prepared.
If scenario 2 (I find this most likely) takes place, as a day trader I will long the first pull back of the rally, I use a number of technical confirmations to identify such and I will update this idea with those as they play. Scenario 2 has a 5 impulse structure in play like the first move from 9049 to 11120. So my long will be placed at the end of the corrective wave 2, with a stop at the current swing low (impulse 1).
Take profit will be left open but as the .618 fib level is crossed I will manage the trade by placing a trailing stop with a tentative quantity of double the average true range indicators reading.
At this point, when we get a swing high on the daily confirming the X wave of the larger double corrective pattern I will open a short to ride the rest of this correction to the take profit points I will update once that confirms.
If scenario 3 takes place then I will be good and in a nice long, I don’t find this scenario likely yet. As possibility, this is why I am not placing a take profit in scenario 2 and rather using a trailing stop. Either way I am protected if I set my trailing stop right in scenario 2.
Thats all for now, I will update this as it plays. I trade off of confirmation and currently we have none. The above details the possible scenarios and hopefully gives you insight into the way I do analysis and trade.
As I’ve mentioned on twitter, I am not in any trades currently, and for a reason. The question for me then becomes, what scenarios am I looking at? where are my trades going to take place looking forward? what validates what? To do that, I first need to get a handle on what has happened, & what validates a trade for me.
Corrective
So far the only confirmation of any kind of correction being over is the 3-3-5 structure that ended at 9049. The yellow box is currently unknown.
That corrective structure corrected the final leg (5th) of our rally by hitting a common Fibonacci retrace area (first image below). Looking at the overall rally (second image), we haven’t even come close to correcting any of the common retrace points. At minimum I want to see the .382 fib level hit. More commonly would be the .618, that being said the market doesn’t HAVE to do anything.
Taking this overall picture, I now look at what has happened in our unknown area in the yellow box above. Coming out of the final 5 leg drive and painting a swing low we see a bullish OBV divergence (first image below). Taking it down to a lower time frame to study the rally up, we see the same div but no real significant spike in cumulative volume (second image). This tells me the rally was correcting oversold conditions & not a true impulsive structure that identifies the bottom of our correction.
Taking this information I now want to look at the possibilities of what this is. Seeing a potential 5 impulse structure upwards with weak volume leaves a couple scenarios. At the end of this I will get into my trades and how I play each scenario.
Scenarios
Scenario 1: This structure is not impulsive looking at this time frame & actually a 3 drive with some long wickage throwing off the visuals of the structure. Really the structure is better viewed on the hourly and every fib level hit perfectly for a 5 impulse structure, but I omitted that for an overall scenario analysis. Looking at the fib retrace point to identify this possibility, I see it hit the .5 fib mark but fell short of a common .618 correction.
If this scenario is true, then we should see a break of the low at any time leading to a violent drop to the 1.23 level at 8402 which is the maximum of a 3-3-5.
However, this scenario now doesn’t make sense, remember we made 2 sets of ABC corrective moves to begin the correction, corrective patterns that start with a 3-3 end with a 5 unless it is a triangle. If the drop from 13222 to 9049 was wave 1, and this rally from the low was a corrective 2, then this is wave 3 and its minimum end point in a falling 3 is the 1.23 fib extension of 1. That would take us to minimum 6989 invalidating the maximum of 8402 in the 3-3-5. Again, markets don’t have to do anything, but technical analysis helps with deductive reasoning.
Scenario 2: Since the above scenario doesn’t make much sense, we look at what the targets would be if the 5 impulse structure coming out of the low was an A drive. This correction currently is a B, and our targets are derived from the AB for the C. If this scenario is true, then we can confirm the larger corrective pattern at the end of C. I’ll get into what that is at the end of this scenario.
The A wave commonly hits the .5 fib level of the prior trend, as I noted above, it did. Corrective wave B (our current structure) should be attempting to find a bottom. It has been hovering around the .764 & .854 fib level, these are common points. However in a flat ABC this can be up to 100%. There I have my invalidation point which also confirms funky scenario 1 by breaking the low.
Taking this into account, we would make a five impulse structure up to either the .618 (minimum), the 1, and lastly the 1.23 fib level. Invalidation would be at the 1.618 in pink which confirms the bottom of the prior structure (we will get into that in scenario 3). Since the deep retrace level of this B (if we count the wick) then this looks more likely to hit the minimum .618 or 1 fib level.
Scenario 2 is actually a big scenario since we are actually confirming a larger corrective pattern called a double combination. We confirmed the larger ABC talked about in the beginning, this corrective ABC we are forming would be the X of a WXY and the first correction is labeled as W.
To confirm it as an X in a double corrective combination we need to see a swing high printed on the Daily of at least the .5 fib or any of the yellow fib lines below. Now I begin to see some collusion in this analysis, it so happens that the 1 fib of the C is actually at the .5 minimum of the W move.
If this is the case, then at that confirmed swing high of the ABC, we take the fib extension and target 61.8%, 100%, or 123.6% of wave W to find our bottom. To speculate on where the bottom would be in this scenario, I have placed the end of X (speculation until a confirmed swing high) at that .5 of the yellow fib. We now can see some potential targets for the bottom that can be refined as the correction happens to a more exact point.
Scenario 3: This scenario is bullish overall and that confirmed 3-3-5 ABC mentioned at the beginning was the bottom. Likelihood of this doesn’t seem high as we have issues with volume and overall structure but let’s look from an analysis point of view and identify the confirmation.
Going back to the pink line I mentioned in the third paragraph of the last scenario, the pink 1.618 in the image below identifies this rally as a 3rd impulse considering we made a sub 5 in the potential A coming out of the bottom. It’s pretty simple to identify when it happens: If the daily continues upward without making a confirmed swing high to reach that target, then we have a confirmed bottom and the corrective A that I discussed in scenario two becomes a impulse 1.
Conclusion & Trade Strategy
So yes I get it, using Elliot Wave theory leaves open a lot of possibilities. I applied this as a means to make sense of the market, I still use Ichimoku, the ALPHA indicators and volume analysis when basing my trades, this correction requires additional detail which is what I have done. Also, the fib extensions in scenario 2 & 3 could adjust slightly if we break 9111, this is assuming that is the bottom in scenario 2 & 3 since there is not much wiggle room till invalidation from that low. On to my strategy…
If scenario 1 confirms by breaking the low, then I open a market short on the break with a stop at 11120. At this point I feel something is wrong with the overall market & not operating normally. I am ok with a market order as a hedge there; Take profit and management will be done after. However, after doing this analysis I find this unlikely because of the invalidation that is detailed in that scenario. Either way, perhaps I have made a mistake somewhere along the line, if it takes place I’ll be prepared.
If scenario 2 (I find this most likely) takes place, as a day trader I will long the first pull back of the rally, I use a number of technical confirmations to identify such and I will update this idea with those as they play. Scenario 2 has a 5 impulse structure in play like the first move from 9049 to 11120. So my long will be placed at the end of the corrective wave 2, with a stop at the current swing low (impulse 1).
Take profit will be left open but as the .618 fib level is crossed I will manage the trade by placing a trailing stop with a tentative quantity of double the average true range indicators reading.
At this point, when we get a swing high on the daily confirming the X wave of the larger double corrective pattern I will open a short to ride the rest of this correction to the take profit points I will update once that confirms.
If scenario 3 takes place then I will be good and in a nice long, I don’t find this scenario likely yet. As possibility, this is why I am not placing a take profit in scenario 2 and rather using a trailing stop. Either way I am protected if I set my trailing stop right in scenario 2.
Thats all for now, I will update this as it plays. I trade off of confirmation and currently we have none. The above details the possible scenarios and hopefully gives you insight into the way I do analysis and trade.
Note
We are about to enter the phase where a bunch of people scream "fake out" & a bunch of other nonsense with no analysis & pure emotion.Just know I am not phased and will be longing as detailed here in my analysis covering this correction & how I stay profitable no matter what.
Note
Creeping up to that fib extension mentioned in scenario 2. The Alpha: Reversal is triggering a significant div on the daily but just barely.4 & 6hr are showing their bear divs cleared indicating to me there is more juice left to reach that fib target or the target mentioned in scenario 2. Short term, the hourly and below needs a cool off period to clear those divs.
Seeing as this is close to that 1 fib but needs a low TF cool down I will keep an eye on it for an early rejection here. Again, scenario 2 requires a confirmed DAILY swing HIGH to confirm the lower leg down. To invalidate scenario 2 the pink fib extension needs to be reached turning this impulsive before a D swing high.
Note
Keep in mind this is still within the levels of a larger corrective pattern, all of it spelled out in the analysis. Yes this could rally on, but also as detailed prior, the mark to turn this into an impulsive structure is that pink fib extension. A wise day trader who was not in a long would be wary of longing dips that may occur & rather be watching this level for a break to invalidate the more reasonable corrective pattern or a swing high on the D. Then again, wise traders are not very common in Bitcoin. Confirmation is one of the keys to longevity.
The apex to becoming profitable is when you understand these basics:
1. Technical analysis is variable & there can never be an absolute other than invalidation or confirmation.
2. Trading is conditionally triggered as the variables of that analysis are invalidated or confirmed.
Note
Note
Interesting place that this Daily wicked off of. Right at the exact low of the swing high (11,200 on the dot), I'll be traveling the next couple days but will try to update this as things layout.Note
I am really struggling to find a bullish case here for BTC. $12325 would need to be claimed with a close for me to cancel out $7500-8066 as the bottom of this correction.Note
Trade closed: target reached
Confirmation would be the 3 day closing in 2 days from now above 8820, Daily close in 4 and a half hours above 8352 is supportive.
Enjoy the Bull
My apologies for not updating this idea as much as I did on my Twitter, keep an eye out there for my tradingview tweets.
All posts are for educational purposes and are simply my views of markets conditions.
Please do your own research and use my content to educate yourself.
Please do your own research and use my content to educate yourself.
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.