Technical Analysis February 23, 2021

Technical Analysis

Good Morning!

Just when you thought things could only go up, bitcoin proves you wrong!

I will now attempt to dig deep into the structure of the market without pointing to a single trigger that caused the move. This is because I believe there was no trigger.

Let's start with the pure price action on the daily chart.

Bitcoin BTC (daily)

We encountered a very clean bull run that started after the March 2020 sell-off. Each significant high and low was followed by a higher high and a higher low. Firstly, that is the structure you want to see if you are long on that asset. Secondly, you want to see increasing volume following the price. This combination confirms the trend. In my view, these are the bare fundamentals when looking at a price chart.

Now, let's add in some "secret sauce". And just to be clear here: I do no have a crystal ball. I am just adding in the indicators I feel have helped me fine tune my risk management the most during my trading career.

On the daily chart we can clearly see that the Ichimoku cloud has been pointing to a bullish scenario ever since June 2020. The cloud has been green ever since then, and the price has never violated the lower band of the cloud. The baseline (blue line) has been a good guide for short-term sentiment changes (bullish continuation above and accumulation below).

Since the trend was so steep and strong, our last higher low was set at $29k and the baseline came in at around $40k. So, technically, a correction could easily go into the low $30k area without violating the basic rule of higher highs and higher lows.

Let's zoom into the 4h chart.

Bitcoin BTC (4h)

You will immediately see here that the Ichimoku cloud is a bit jumpy, and flips from bullish to bearish. But the flipping on this particular chart section was where we printed the last significant low at $29k.

Now, we have already crossed the baseline to the downside, and the two recent lows have touched the upper band of the cloud. In combination with the levels we identified on the daily chart, we can assume that there is a good chance that we will penetrate the cloud, or even trade through it, and depending on the duration of that accumulation phase, the cloud might even turn bearish at some point.

Now I add in the price volume bars (on the right-hand side of the chart). They help me to verify the support and resistance I saw when looking at the pure price action. My dotted range is basically the range of the $47k liquidity pool, which is next to the $35k liquidity pool, which is the second largest one.

As a first statement, I see a shallow correction holding the $44k level. If the market needs to do a deeper correction, I consider the $35k area to be a good level to put on some trades.

As I said before, I do not have a crystal ball. My guess about the deepness of the correction is as good as yours. So, I think that at this point of the analysis, it is a good time to dive into the derivatives market.

Let's first have a look at the funding basis (term and perpetual futures). To me, this is one of the easiest sentiment indicators to follow. I am using the data of skew.com (annualised rolling 3-month basis). Looking at it over a 1y timeframe, we see that the basis has continuously widened during the bull run. There were some setbacks in September, where we also experienced a little price wobble.

When we zoom into the 1 month timeframe, we can see that around February 18th we reached a local top in the annualised rolling basis. But the price at that point was at around $51k. For some reason, the spot market pushed higher and the derivatives market was not willing (or able) to follow (this was a first warning sign).

The overall futures volume in bitcoin was significantly higher at the beginning of 2021 (compared to the last quarter of 2020). But we saw a volume drop between February 18th and the 22nd (this was the second warning sign).

To sum up my analysis: I always look at the volume pattern when there is a large move. It helps me to determine how high the chances are that we will see more pressure, or if we have witnessed a wash-out and a large movement from weak hands into strong hands. The spot and futures volume rather show me the latter, which would point to a rather shallow correction that will not go deeper than around $47k.
But only time will tell...