BarnBuilder

BTC Up or Down: Comparing Price Action With 2017 Market Top

KUCOIN:BTCUSDT   Bitcoin / Tether
BTC continues to consolidate as everyone wonders what is the next move. One thing is for sure. BTC will not continue to move sideways with lower volume and lower volatility .

After BTC retested its May low, I started to heavily trade a 30K to 40K band. I felt the downside risk was reasonably established at 30K. Talks of a V-bottom recovery and a double top created enough positive sentiment to create a modest 30 to 50% upside. My strategy was to trade the volatility - every 250 pts down I bought, and I sold them 250 pts up. The strategy takes advantage of the market inefficiency of pricing BTC following a large impulse shock. The strategy was very effective.

However, as time progressed, volume , volatility , and the highs came down. Sentiment also got progressively more pessimistic. The number of trades/day decreased, and the the profit of my strategy dwindled by 50%. Overall, as the highs got lower, I had to reanalyze the risk/reward. The upside swings were getting predictably lower, on lower volume , and the downside selloffs were getting faster with more volume . The potential of an upside reversal is always possible, but the price, volume , and volatility on multiple time frames said the chances were low without a news event. Trading a wedge triangle where volume and volatility are dropping off tends to favor trend continuation.

As a professional investor, I need my money in the market making money. So, for me, I had to make a difficult decision. In, or out? My gut instinct was to get clear. Every monthly, weekly, daily, and 4hr trend are unfavorable even though many feel the price of BTC is "once in a lifetime". I wanted one more indicator or piece of the puzzle before I made my decision so I looked back at previous BTC cycles to see if I could find a similar pattern of narrowing consolidation following a market top. I found several, but this one really emphasized the risk side of the equation, and the potential for a very nasty further sell-off.

The 2017 market top and sell-off is not an apple-to-apples comparison. Frankly, I just wanted to find this current long consolidation pattern after a sell-off to see what happened. The 2017 consolidation was actually quite longer than what we are experiencing. The fractal pattern is squished to make it easier to visually compare - obviously its comparable. The 2017 sell-off after the fractal pattern isnt shown, but its straight down and another 50%. That creates a realistic "low" of 16K. I've done regression analysis of BTC over its lifetime, and that worst case scenario is around 6.5K so 16K is being generous.

The volume profile is a fantastic tool. From the ATH till now, the heaviest volume centers around 35-37K (say 36K ). These are all short term holders (<6 months) who have the weakest hands. I'm assuming many have stop losses around 10% (around 32K). As price hovers lower and lower, I expect short term holders to get more nervous as the upside swings disappear, pessimism in the news grows, and they spend more and more time with unrealized loss. The priced stopped going down and settled at 36K because the short term holders sold out from their weighted price which was centered around 58K (bull run). New short term holders were enticed at 30K (a 50% discount ) and stepped in to stop the bleeding. However, those short term holders have now stocked their bags and are looking for profit not loss. They will be could be the markets new worst enemy if price tests the lows and they start to sell. The next big volume of holders is at around 20K. They sit comfortably watching the melee, but if price doesnt hold 30K, I have to believe many of them will also become sellers to protect whats left of their profit. The bottom line is that if price isn't moving up, the market will push lower which will eventually trigger a flood of new selling that the market may have trouble absorbing. For this reason I'm out for now.

Comments

So it means you are assuming that bull run for 2021 is over? Also don't you think that market dynamics are completely different now when compared to 2017?
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@hdcrypt,

This is a question that many of my peers regret not asking. They followed the herd, sold nothing, added on the way down, and are looking at large unrealized losses. Benjamin Cohen is a popular YouTuber that I feel frames the 2020 bull run best. His answer is that this bull run has not ended like any of the others therefore it might not be over. He makes some good arguments that the bull run cycles are lessening in upside (ATH to ATH) and lengthening in duration. He posits that the bull will rare back in Dec 21 or 1st quarter 2022. His projections remain the same, and investors (hodler's) might find that comforting.

As a trader, I have a long term opinion on crypto, but its not relevant to me right now. Whether the bull run is over isnt relevant to me right now. What is relevant is that the monthly, weekly, daily, and 4hr time frames are bearish, the sentiment is bearish, the tightening wedge pattern favors downward movement, and the buying intensity and volume don't make sense with a probable break to the upside. Why trade tomorrow?

Here is what I wrote back on May 16th and its still relevant. History says that the longer it is below the 21 week EMA, the higher the probability that larger drawdowns will come.

"BTC closed below the 21 week SMA. History shows that there isnt a single case where it bounced right back above that. I found 3/7 cases where it took 7-8 weeks to regain it. During that period, there were drawdowns from the 21 SMA line of 20%, 30%, and 54% (covid). 3/7 times it took 13-18 weeks to regain it with drawdowns (34 - 72%). One drawdown took 64 weeks and had a further 67% drawdown. The statistics dont favor BTC"

Are the market dynamics different from 2017? This is the most interesting question of all. The entire crypto existence has existed within arguably the greatest economic bull run of all time. Every crypto retrace, crypto winter, and bull run have all had the support of global upmarket optimism and abundance of speculative money. Crypto can arguably be considered the "most speculative" investment, and perhaps be a leading indicator for a larger market shift in sentiment. I've been studying the possibility that the crypto bull run has been cut short due to an impending overall investment market top. I see the same Wycoff distribution pattern in the DJIA that I saw in BTC, and I see the Nasdaq going parabolic (blow-off top). It would be hard to argue that investors aren't getting nervous that the music may stop.
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hdcrypt BarnBuilder
@BarnBuilder, Selling nothing is the major problem, all such people are really in losses, I have personally always booked my profit, bought 33K MATIC @ 5cents in Jan earlier this year and sold them @ $2.2, and same thing was done with BTC, WIN, ETH & DOGE, always sold at the top, I have been watching crypto market since 2011-12, was about to buy 100 BTC @$10 around that time (regret not doing so and who will not), just recently since December'20 I actually started trading, I have seen in the past that how the whole crypto market prices swings so always kept the strategy to cash-in the top and it kindaa has worked for me as it has given me enough liquidity to still trade 1 full BTC in the current market, again I am buying the bottom and the last dips, since May 23rd bought @$31K, $32K, and $31K and sold them with an average profit/rise of $5k each time, there is no point of going long but short trades of 4-5 days range are still giving decent profits. Its just about timing it right, entry and exit matters a lot in trading.

Completely agree with 21 week SMA, history is perfectly right here, it does take lot of weeks to regain, moving out is a brave decision which you have taken and I really respect that.

Thanks! for such a great explanation, have a nice time in btw :)
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