monkia

Part 2: The Elliot Wave road to $3k or $20k+

BITFINEX:BTCUSD   Bitcoin / U.S. Dollar
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If you have been following my earlier post (The Elliot Wave road to $3k or $20k+), you will see BTC has performed as expected. I was able to short on the way down to 7.3k and I am now in cash.

BTC has completed 5 waves down from 11.7 to 7.3k, with an extended wave 1.

Bearish view: This was wave 1 of the final wave 5 down from the top.
Bullish view: This was wave 2 of the of a five wave impulse up from the $6k low.

It is now in the important wave that will likely provide the key indication of bearish or bullish views and therefore where it will be going over the next few months: $3k or $20k+. This current wave will either be a corrective ABC leg to around 10k which flips into a long 3rd wave down or it pushes through the 10k with an impulse wave up which could see new ATHs at $20k+.

My bias is bearish until I see the break of the 10k. However, I intend to trade through this process, managing risk using EW, Fibs and trades with clear targets and stops which present a good risk reward opportunity.

The more detailed chart below shows the setup I am looking to trade in the short term. There is resistance forming on both price action and RSI . It may go straight up from here. However, a retrace could come soon and will present a buy opportunity if it goes as far as the 0.786 level (7.6k). This will give a good risk reward of 6:1 on a trade with a target of 9.8k and stop at the low of 7.3k.



This is the chart of the bullish 20k scenario:








Comment: My trade plan is to wait for a retrace but it's important to remain flexible if the price action/pattern and risk reward trade becomes available. BTC is currently in the process of creating a textbook corrective triangle. If I see the E leg form I will look to enter a small trade. With a tight stop loss, just under the triangle edge, it is _high_risk_ but high reward with an R of 11:1.

Some traders look to enter this pattern on a breakout above but I find this more risky with BTC because (a) the number of fake breakouts (whale manipulation?) and (b) the fast pace of breakouts delivers an execution price quite a bit higher than the actual breakout area which then result in a larger stop loss and much lower risk return. My preference is to go in early and then if it looks to be going my way, I move the stop loss up to the entry price to protect against a fake breakout.

Comment: The breakout occurred without forming an adequate E leg so I didn't go in. This is not unusual and I'm content to miss out on some trades to ensure I am balancing risk reward.

RSI is overbought on the sub 15 minute time frames so a little bit of consolidation will occur before it can go up again.

One trade option is to wait for it to revisit the breakout line and then enter a buy there with a stop just below the line. The problem with this is that there are only two points on that upper trend line so it is not particularly clear where the breakout line is. No trade for me on that pattern.

I'll hold tight and now be looking either for a retrace to the 0.618 (7.9k) to 0.786 (7.6k) area to buy in. However, the big trade I am looking to do is short at the 9.6-10k area.

Comment: We could still see a retrace before pushing up but it is becoming less likely. I am now looking for the following set up to short.

Reversal in the area of 9470 - 9900 which coincides with the following:

1) 0.786 - 1 ext of A wave from 7.2k to 8.7k
2) Top of Wave 2 on way down from 11.7k and numerous other resistance around that time
3) 0.5 - 0.618 retrace of the wave down from 11.7k to 7.2k
4) Linear diagonal trend line from ATH and 11.7k

My stop will depend on how early I enter but provisionally I will be looking to have it just above 10.1k, which, depending on timing, will hopefully coincide with the log diagonal long term trend line.

Target is initially the 7.2k but I would likely let it run (shown in orange).

This could just be the first leg of an impulse up and so I will be mindful of a retrace from here which then moves into the 3rd impulsive wave up (shown in blue).

Trade active: The market has likely paused for breath before attempting the push to the high $9ks. It has just retracted bang on 0.618 of the latest wave up from $8.3k and could go on to do the minor waves 3 and 5 from here. However, it might go further, down to 0.618 ($8k) of the complete wave from 7.2k, which is the trade I have been waiting for since around the 20 March to enter a short term long on.

I placed a highly speculative small short just at the top of the breakdown near 8800 with a very tight stop of 8805. I'll let this ride to 8000 or get stopped out at my entry price for a nil gain/loss.

Comment: p.s. given the short term price action, I would NOT be shorting at the current price.
Comment: There are numerous possible counts here, however my take is as follows:

I can see the potential of a corrective ABC forming with A completed at 8700 and an extended (1.618) 5 wave C forming. If the 8.6k holds (or 8.4k 0.786) and BTC goes up from here, an ABC pattern is reinforced by this 0.618 as the 1st wave of the C leg. This would increase my bearish bias but will kick my stop on the last trade into touch (at 0 profit/loss).

Under the bullish scenario we should be in an impulsive start of the Major Wave 3 (see chart at the top). I am struggling to see a clear wave 1 and/or wave 3 here. Maybe we are still in wave 1 or maybe wave 1 is done as they can often be really small in BTC? Or maybe the waves are hard to see because the impulsiveness of them means the retraces are very small. If this retraced to around 8k (0.618) I think it would be easier to argue for wave 1 or wave 3 completing. However, even then, this could be an ABC with a 1:1 on A and B.

... and of course, we can just head south from here.

I'm slightly contradicting myself as I am bearish but I am targeting a bullish retrace ($8k) on this trade. I suppose this demonstrates how close I think this call is between the bulls and the bears. In summary, on the small scale, until we breach or reject the high 9ks, EW analysis doesn't provide a lot of assurances to either scenarios but they and the fibs do give indications of potential trade zones to make a call one way or the other and if placed right should allow for tight stops which risk little or can end up being breakeven.

Comment: This is the trade set up I am looking for now. I'll aim to buy back my short at a reversal around 8k plus go long at a stronger reversal signal, targeting 9.8k to go short big.

Comment: If BTC forms an ABC within this W->X, this will be the place for a retrace as it is the 0.316 of the W wave. If it retraces to around 8700,I will look to re-enforce my short.

It could of course go all the way back up or down from here and I will continue with my earlier plans.

Trade active: I entered last night through a prebooked order, but went relatively small because I wasn't at the computer. It retraced slightly further than I forecast, to the 0.5 rather 0.316.

Now I need to decide when to exit. I can see a wave structure which could be an ABC 3-3-5 (1:1.618 for A:C). However, I will continue to trade an ABC with a 1:1 ratio for A:C, which would target around 8150. However, I have placed a stop on both orders at 8562, which is just above the 0.5 retrace of this last wave.

At that point I will consider going long also.

Trade active: I shorted a small position at this reversal with a tight stop.

Entry 8482
Target 8000
Stop 8504

I have now moved the stop to entry.
Comment: Battle of the bears and bulls. The bulls need to hold the RSI trend line (bottom of chart) shown below, the bears need to break it.

Comment: My small order got stopped out at just above break even but my main orders from earlier continue to run. This is setting up well for a 1:1 ABC:

- 1:1 extension of the wave down from 9200 to 8450 is 8050
- 1:1 extension of the wave just completed from 8800 to 8300 is 8100
- 0.618 Retrace of the wave up to 9200 is 8050

This could however go to a ABC of 1:1.618, giving a target of 7600 - 7800.

I will exit my shorts at that point. I will then wait to see if there is a bounce to go long or further weakness to re-enter my shorts.

Comment: These are the trades I am looking to do next. I am almost 99% sure I will exit around 8.1k. Then I will buy or sell after the first retrace and retest depending on what path that follows (long = blue, short = yellow).

Comment: The retrace stopped bang on the 0.5 Fib of the wave up from 7.2k, which also was the bottom of the B wave on the way up. The key signal, which I missed, was the 1HR RSI showing a divergence. My stops have taken me out for a relatively modest gain.

My next trade will likely be a short or long around the 9.5-10k area.

Comment: RSI divergence on the 1HR timeframe. I wonder if it will range trade sideways for a while to generate the spring to challenge the long term diagonal.

Comment: I am looking for the following set up to trade:

1) This current retrace to go slightly further, to 8.3k with a reversal signal to enter a small long. Stop at 8.2k. To then sell on a reversal further up in the ABCDE formation before breaking out to test the long term trend line.

2) The current support to break down to sub 8k, to then enter a short trade.


Comment: I forgot to say, there is RSI divergence on the 1HR TM so, whilst I wouldn't rule it out a dump from here, the TA supports a reversal on the short term.

Comment: It looks like we are heading for a triangle formation. Triangles are typically continuation patterns. The big question is whether this is a triangle on the Wave W up from 7.2k (scenario 1), which should break up to continue the wave up and test the long term diagonal trend line. Or, is this a triangle where the wave up from 7.2k was wave A of the ABCDE triangle (scenario 2), which should break down to continue the wave down from 11.7k.

I think the price action over the coming day or two should confirm either of these and provide the set up to place a large decisive trade long or short. If this C wave is unable to hold the support at 8.2k and breaks down to 7.6-8k, I would be trading the scenario 2, otherwise, I'll continue to trade scenario 1.

Scenario 1 : Triangle on W - E to break up


Scenario 2 : Triangle from 7.2k - E to break down
Comment: Looks like scenario 2 is forming. There could be long trade opportunities coming up for those that are bullish based on respecting the triangle formation. Given I am bearish, I'm not sure I will take them, but let's see what price action occurs if it reaches out this far:

Entry: 7800
Stop: 7499 (bottom of support area) or
Target : 8850
R: ~3.5

Entry: 7550
Stop : 7250 (double bottom)
Target : 8850
R: ~4.5

Comment: The 1:1 on a potential ABC from 9.1k is 8.1k, so there could be a reversal around this point but I will not trade it.
Comment: This could be the short term bottom, but I dont think so, or at least it is not the kind of signal I will trade. The RSI is oversold on 1HR TF but it is showing no RSI divergence. The below lines in pink show the kind of reversal I want to see for entry. Trading now is targeting a V like reversal which typically (but not always) follow a significant sell off, which I do not think we have seen over the past few hours (yet).

Comment: - 7800 : 1 extension of wave 1 of this final C leg from 8600
- 7800 : 1.272 extension of the recent wave A from 9046 to 8665
- 7700 : 0.236 retrace of wave up from 7.2k
- 7600 : 1.618 extension of wave A from 9.2 to 8.3k
- 7550 : 1.618 extension of the recent wave A from 9046 to 8665

I'm not trying to catch a falling knife. My conviction is 7600 buy in but I will buy in earlier if I see RSI divergence. If it does a V I'll miss out unless that is bang on 7.6k.

Comment: I just do not see a V reversal coming on this price action. I expect, and will trade, a bottom formed over at least a 4+ hour period, with signs of RSI divergence. I may be wrong and miss the low point or the entry entirely but I would far rather wait to see a bottom established and trade off a few % gain for a clear reversal signal which would also give clarity on the position for the stop and measured risk / reward.

Comment: We are getting closer, RSI divergence on 30 min TF is starting, but I want to see it on the 1HR TF

Comment: I think we have just completed wave 3 of the C leg of the ABC. It ended on exactly a 1.618 extension of the wave 1. If this retraces a little, my target will be a 1:1 for wave 5 vs wave 1. Once I have the top of wave 4 I'll have a target buy in for either buying into a V reversal or waiting for reversal signal.

Comment: The 5min TF shows it already did a 0.382 retrace to 8k. Based on this, the 1:1 target of A:C would be 7650. I'll look to enter 25% of my position here and the remainder on a reversal signal.

Comment: To buy in the full position I am looking for a higher low formation (or double bottom) on the price AND RSI to reach out past 60 on 1 MIN TF.

Comment: Updated wave count. Wave 5 has gone just past the 1:5 1.272 ext. It may go to 1.618 (7650 which was my previous target) but this would be fine by EW theory but probability favours 1.272.

Trade active: Entry : 7763
Target : 8800 ( to be confirmed)
Stop 7750

RSI divergence on 1 HR time frame (this is what I was waiting for)
The rejection of the ABCDE on the 1 min TF

I will look to add to my position if we see a slight reversal with a higher low e.g. at 7825 or above.

Comment: Sorry, stop is 7550 not 7750
Comment: This was the RSI divergence I was wanting to see:

Comment: I want to see RSI on 1 MIN hit oversold before doubling down my position. It's not for me, but some with enter on this A-E triangle breakout if it comes

Trade active: Entry : 7874
Target : 8700
Stop : 7824 (very tight)

1 min RSI oversold criteria met with a small bounce back, entry with a very tight stop.

Comment: Stops on all orders moved to 7819. Average risk free across the combined trades. If this structure breaks down there will be another opportunity to go back in or consideration for a short.
Trade closed: stop reached: Trade closed with stop ticked in with breakeven trade. I wont chase at this stage, if that was an ABC down from 8040, the C was only 0.718 of A. Probability is a 1:1 (7745) or up to 1:1.618 (7650 - my original target).

Comment: It is tempting to buy back in after getting stopped out when one has waited for a structure to form for so long. I was almost at the target buy in, RSI divergence, etc, .... boxes checked. This could still be the reversal but I dont think so, I would buy back in if I believed it was. I was expecting to see a relatively clear impulse up structure from the low. But this looks more like a corrective structure. This could be a simple 2nd retrace of a 5 up, but I think we could be forming an ABCDE triangle to go down again, probably to the original target of 7650. I will probably buy back in again if we go there. The other option is to buy in on the break of the top of this triangle that is forming, but given the price action and my overall bearish conviction, I dont think I will do that.


Comment: Whilst I am mindful of the 10k break, overall I am bearish and think we will go to around $3k. However, I intend to trade both ways on the way down. Given I am bearish, any long trades will be with tight stops, which I will typically move up quickly. Yesterday my long got stopped out early and I did not go back in because I felt that the wave we were in was still corrective and was likely to go down again.

My conviction remains that we do not go down far from here.

- On the 1HR TF I can see RSI divergence screaming loud and clear. This is now also visible on 4HR TF.
- The small wave we are in from 8100 is a diagonal. Whilst it could be a leading diagonal, probability and the wave structure before it back that it is an ending diagonal.
- I have been writing about how the fibs of the overall wave from 9100 has been targeting 7650 for many days
- My conviction is that a drive down to the 3ks needs more air, RSI on the 1D TR is 35, not far from oversold

I will be looking to go long one more small wave down to probably 7650, but I'll go in based on price action. I could be wrong and we could go down from here, and given that I am bearish, I'll need to manage entry with a tight stop.

Comment: I was looking for a double bottom at around 7550 to go long but it didn't come. It may bounce from here but I can not see any clear TA or support to suggest that will happen. I think the next opportunity for long is a double bottom at 7.2k but I'm unlikely to go in on that.

I'm pretty sure it will retest the diagonal down trendline again at some point but it is hard to say what the bottom will be before that. I'm just risking portfolio erosion trying to either long or short at this stage. My plan is to wait until a retest of the diagonal and then either long or short that.

Off for Easter now so not many updates over the next week or so, happy holidays if you are so inclined.
Comment: New updates will be posted here:

5 waves down from ATH is not a valid wave-count as that would require the impulse to be the start of a 5-3-5 zig-zag which would take us into sub-zero territory for a valid wave-count ( C >= A ). Would you agree?
Reply
monkia theansweris42
hey @theansweris42, it would be valid if there was a overall change of long term trend from bull to bear. i.e. If from 2014 BTC was in a bull trend and now it has moved to a long term bear trend. So from now on, for a prolonged period of time, the moves down would be impulsive whilst the moves up would be corrective. A lot of the dotcom stocks followed this pattern in dotcom crash.

Also, as you suggest, it could also be valid within an overall bull trend if this was an ABC and these 5 waves were just the A. The magnitude you refer to is measured on a % change basis (log) rather than linear. So for example, if you were trading (C>=A) and this A was 20k down to 3k (85%), and the B took it to 10k, the C would need to be at least down to 1.5k (85%). However, whilst I would expect the magnitude to be similar and whilst C>=A is most common, this is not a rule of EWT and it is not uncommon for C<A.
Reply
@monkia, As I understand all markets are necessarily bullish at the largest degree as their very existence represents an economic progression from nothing. By extension of this axiom, any regression must represent a correction of the next larger (bullish) degree and therefore must take the form of one of the corrective structures identified by Elliott. By further extension, the only permissible structural fit for an initial five wave impulse against the larger trend is a zig-zag. Wave C can be 61.8% to 161.8% of wave A (Elliott Wave Principle). A = 14k (20 - 6), B (peak) = 12k therefore C (A*61.8%) = 8650 so at a minimum C should take us down to 12000-8650 = 3350. My initial assertion that this is not valid is thus false, however we can, in principle go down to near-zero and this would still be a valid zig-zag. I'm keen to know your thoughts on this.
Reply
monkia theansweris42
@theansweris42,

Wave C can be 61.8% to 161.8% of wave A (Elliott Wave Principle).

This is a proctor guideline rather than principle, which means it usually holds true, but not always.

A = 14k (20 - 6), B (peak) = 12k therefore C (A*61.8%) = 8650 so at a minimum C should take us down to 12000-8650 = 3350.

I agree with this math, and think the structure has a high probability of being the correct one (it is my secondary scenario I have noted but not shared). Bear in mind that C is usually the aggressive wave (equivalent of 3rd wave) so is more likely to be 1, 1.214, 1.628 ext of A. I haven’t spent much time deciding between the two scenarios because for the coming period I believe they are likely to share the same targets and overall behaviour. It’s what happens after this impulsive wave down to circa 3k that determines which is the actual structure.

Reply
@monkia, I'm interested to know your source for the assertion that a log scale is permissible for corrective ratio analysis is this is not mentioned in the orthodox rules (Elliott Wave Principle, Prechter and Frost). Thanks for your time and quick response! :)
Reply
monkia theansweris42
@theansweris42, proctor and frost is my source for most things EW related. Chapter 2, wave equality:

“When waves are larger than intermediate, the price relationship must be stated in percentage terms.”

They also discuss it later under the title of Scale.

They address your other question far better than I could by discussing market behaviour in bear vs bull market and show all of the waves (impulse and corrective) in both the bull and bear trends. Eg figure 1-37 shows the DJIA in a bear trend (impulsive down in 1973) with a corrective abc up.

My conviction is we are in a bear trend and this would see impulsive action down not corrective. This could well change to a bull trend and the wave count would then fit to my bull chart.
Reply
@monkia, I see yes. That's a good spot, I missed that. Thanks for your insight! :)
Reply
monkia theansweris42
@theansweris42, no problem, thx for the questions, they help me think and get my head straight on things, a large part of the reason I do these posts. I think your abc down from the top is highly likely scenario as well and will be open to trading that once we reach the 3k.
Reply
Happy Easter :)
Your original chart is working really good!
+1 Reply
thanks for updates and wish you happy easter and profits!
Reply
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