The prices seem to be flying up every time you check them and analysts are salivating at the idea of another parabolic run everywhere you look. Could this be it? Could we really be past the worst of the 2017/2018 crash? Well, in a market with a million manipulators, super computers, whales and maybe even a few government agencies thrown into the mix, nothing is ever as simple as it seems.
The breakdown to $9499 last week failed to take, after massive buying support in the low $9000 region on major exchanges. It's hard to know if this was really organic buying, but my feeling is that it was engineered by vested parties who wanted to prevent a dreaded return to early February's lows. Fairly lacklustre increase in overall buying volume seems to lend some substance to this assessment.
There are currently two potential outcomes for the currency over the coming days or weeks and volume will be the deciding factor.
(1) The Inverse Head and Shoulders Breakout (fig.1)
The 3 month 12 hourly chart seems to have formed somewhat of an inverted head and shoulders pattern, which could mark a potentially true reversal for the currency's recent woes. The basis of the inverted head and shoulders pattern is:
- An established previous downtrend
- Left and right shoulders of similar depth and width
- A head that drops to a lower value than the shoulders
- A neckline that connects the highs of each shoulder
- Consistently increasing buying volume
Despite appearing fairly robust, the pattern still raises some concern for two reasons. Firstly, the neck line slopes downwards - which can sometimes herald a lower likelihood of the reversal pattern completing. More importantly, as the right shoulder has closed upwards in the last few days, the volume has failed to gradually increase (fig.2):
Sudden, sustained and expanding buying volume could still create the reversal to catapult the price upwards, however, and the key price level for the required upwards break of the neckline would be around $11,600. But remember that unless the price and volume action proves itself, the run up and even the breakout could be the mother of all bull traps.
(2) The Rising Wedge Breakdown (fig.3)
In stark contrast to the promise of a breakout, a more short term analysis (the 4 hourly chart as of 4th March 2018) seems to indicate the formation of a rising wedge, which if it completes could herald the abject failure of the inverted head and shoulders breakout and instigate a sharp breakdown below previous resistance.
The rising wedge requires:
- A prior trend
- An upper trend line that is created by at least two highs, each one higher than before
- A lower trend line that is created by at least two lows, each one higher than before
- A flatter upper trend line than the lower trend line
- A contraction of the trading range and a decrease in volume as the wedge matures
The short term chart more accurately fulfils the criteria for a bearish wedge breakdown than it does an inverted head and shoulders breakout and the key differentiator is the volume. The breakout requires a genuine and organic increase in volume, which we just aren't seeing. Even worse for the bulls, the declining volume and trading range is exactly what you'd expect to see in the formation of a wedge pattern before it cracks and spills the price action all over the floor.
Summary
The price action could either conform to an imperfect inverted head and shoulders breakout or a rising wedge breakdown. The breakout is inhibited by relatively low volume and an unlucky confrontation with the upper long term trend-line as seen on the logarithmic chart, the linear sibling of which prevented a breakout past $11,788 last week. The rising wedge breakdown, on the other hand, has the advantage of a better technical conformation to the pattern and the help of the long term trend-line above acting as an obstruction to a breakout. These factors and the stunted volume mean that overall, my analysis favours the breakdown.
Cryptonym.
NB.
Values in USD are representative of prices traded on the Bitfinex exchange.
Times are UTC standard.
This does not constitute official investment or trading advice. Your losses are your own.
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