Still bullish, bitcoin to retest US$16,500 resistance

BITCOIN first began trading in 2010 and has since experienced many episodes of wild swings to the downside. Crashes of up to 50 per cent were a norm in the early days of bitcoin, but all the early moves were almost negligible compared to the current price of bitcoin.

Each asset class behaves differently to different indicators and parameters. Our study has shown that the 100-day exponential moving average appears to be the dividing line between the long-term bulls and the long-term bears. The general rule of thumb, at least for bitcoin, is if the price is above the 100-day moving average, then the uptrend is deeply entrenched, and vice versa. The 100-day moving average is a critical area to watch as it has been the backbone that kept the uptrend intact since June 2015. As long as it holds, the general uptrend should remain healthy.

In total, there were six various occasions where the 100-day moving average successfully reversed sharp sell-offs since 2015, shown by the highlighted areas, proving the importance of the 100-day moving average. Every rebound off the 100-day moving average propelled price into new record highs. The current price action around the 100-day moving average will be pivotal for deciding if the long-term uptrend remains intact or not.

By calculating the major corrections that happened after bitcoin trended higher consistently suggests a high likelihood of a reversal back to the uptrend soon. For this study, we only used the data after 2015 by combining the 100-day moving average signal. Since June 2015, after bitcoin closed above the 100-day moving average, a bottom was gradually established. Bitcoin started breaking higher above the US$300 range. It was around that time when euphoric bulls rushed in and created the parabolic move higher. Bitcoin rose from a low base of US$210 to a high of US$1,950 over two years. During this strong bullish phase, bitcoin experienced 10 major corrections of up to -21 per cent and the largest drawdown was -40 per cent in November 2015. On average, the correction was around -33 per cent before the relentless buyers re-emerge.

Coincidentally, after the futures market went live in December 2017, bitcoin formed a top at a record high of US$19,500 and subsequently nosedived. Part of the reason for the sharp selloff is the ability to short bitcoin in the futures market where it was unavailable previously.

The current correction of -53 per cent has already surpassed both the average correction of -33 per cent and the largest drawdown of -40 per cent in November 2015. This might not come as a surprise considering how fast bitcoin has rallied over the past one year. As the bullish moves go parabolic, a deeper and larger correction is unavoidable.

Therefore, with the current correction overstretching to the extreme, a reversal higher should be expected where the mean reversion occurs. Moreover, with bitcoin testing the crucial 100-day moving average, this makes a resumption of the long-term uptrend much likelier. Bitcoin is also currently sitting at a confluence of support at the US$10,000 psychological round number, long-term 50 per cent Fibonacci retracement level from August 2015 base which should continue to keep the uptrend intact.

From the price action perspective, the bullish reversal hammer on Jan 17, 2018 could very well be the next higher low (HL) point within this uptrend. The current setup is still a bullish bias. Target wise, expect bitcoin to reverse back into the prior uptrend to retest the US$16,500 resistance area followed by US$20,000 psychological round number.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.