Technical analysis is the study of past price action in order to gauge what the market might do in the future. In essence, it is the study of price and can help predict future movements. It is the ultimate study of supply and demand as traders who use technical analysis are not in any way concerned with “why” an asset has moved. Importantly, price movements seen on charts often repeat themselves. Why is this? Because humans move price, and we naturally follow patterns.
Sometimes, it is good to take a step back when trading and analysing markets to understand how we use our analysis to determine trading decisions. In the case of cryptocurrencies and bitcoin, for sure the study of price can help us determine our strategy, entry and exit points and stop loss or target price. And when the digital space is being questioned and many commentators are calling the period “cryptogeddon” and such like, it can seriously help us ignore so much noise, which is either off-putting or simply outright click bait.
Of course, this comes after the longest run of weekly losses since 2011 and a month in which we have experienced “one of the biggest catastrophes crypto has even seen”. This wasn’t actually written by one of the doom merchants but a prominent crypto enthusiast. As we wrote recently, and most notably, Terra and Luna, the two so-called “algorithmic stable coins” imploded, creating $50bn of losses in three days. The overall $2 trillion-odd crypto market has already shrunk in value by around 30% and a new crisis around $80 billion tether stable coin could shrink the market further.
We have been here before and the naysayers quietened down. You only have to think of the 30% plunge after the Chinese regulatory crackdown. It seems we need to return to our technical analysis theme. The cyclical nature of volatility has proven to be non-random. This means that there is an inherent tendency for volatility to expand after periods of contraction and range trading. This is especially relevant then with the current price action of bitcoin trading around the widely watched $30,000 marker for several days and sessions, and narrow ranges dominating price action.
Whilst the cyclical nature of volatility gives no indication of direction, it can be a powerful tool when combined with other concepts. For example, trend continuation theory which tells us of the propensity for trends to continue following periods of mean reversion. The premise that markets have a memory can also help, especially when markets approach key historic inflation points. Like the $30k Bitcoin level. A break higher or lower will be explosive when it comes. Bulls could quickly see $38k, while the spike low from two weeks ago at $25,338 might come into view in quick time.