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Yup, I hate to admit it, but I was wrong with my prediction in this article which I said that there will be an extended correction for Bitcoin Cash. I wrote that my favorite crypto currency will go down at the support level, priced at $325, where buyers are waiting for this golden opportunity to ride the crypto currency market.
Prediction is a tricky business. Nobody can really tell what will happen in the future with 100% certainty. Even in statistics, there is a margin of error which allows for some mistake in forecasting. It is no wonder therefore that investment advisors always tell that past performance is not an assurance of future performance.
What was the trigger that made me expect something different from my prediction? Well, it was the Elon Musk effect, or more precisely, the decision of his company, the technology behemoth TESLA, to buy $1.5 Billion worth of Bitcoin as part of its long-term investment strategy. Reading about this last Feb. 12, I immediately recognized this as a catalyst for the reversal of downtrend pattern.
I went to look at the daily chart of Bitcoin Cash to see if this news is being reflected on the chart of Bitcoin Cash. Lo and behold, the chart was forming an inverse head and shoulder pattern. I even posted this in the #Club1BCH Chamber.
An inverse head and shoulder pattern is a very popular pattern reversal pattern in technical analysis. Generally, this pattern is understood this way:
The price of the asset goes down and then rises, forming the left shoulder. Subsequently, the price falls again lower than the left shoulder and then rises again; this forms the head of the pattern. Finally, the price falls the third time and attempts go lower than the head but is unable to do so; this forms the right shoulder. Once the right shoulder is formed, the price heads upward, toward the neckline which forms the resistance level.
To confirm a reversal, the breakout should also be supported by a huge spike of volume along the neckline. The inverse head and shoulder can also be used to identify the profit target. According to Investopedia.com, "A suitable profit target can be ascertained by measuring the distance between the bottom of the head and the neckline of the pattern and using that same distance to project how far price may move in the direction of the breakout."
Applying this pattern, I have identified the price range of its different components:
Neckline - $520
Left Shoulder - $388 to $449
Head - $366 to $429
Right Shoulder - $410 to $452
Target Price - The distance from the neckline to the head is about 1,530 PIPs. Using this distance, I computed for the target price which is about $674.
The bullish candlestick that broke the neckline began in Feb. 11, 3 days after the signing of the TESLA 2020 Annual Report. Mainstream media captured the news on Feb. 9 and the following day investors began buying crypto currencies. The demand of Bitcoin spilled over to Bitcoin Cash as can be seen on the huge spike of the volume on Feb. 10 and Feb. 11 using the hourly chart.
The disclosure regarding the purchase of Bitcoin by TESLA is located on page 23 of the 126-paged 2020 Annual Report. In summary, TESLA reported that it invested a substantial sum of money worth $1.5 billion on Bitcoin which it will hold for a long-term and to accept Bitcoin as mode of payment for its products. It also acknowledged that there are risks associated with their decisions.
Using the Theory of the Diffusion of Innovation which I used to explain adoption of crypto currency in my previous blog, the very public announcement of TESLA's acquisition of Bitcoin, signals the start of adoption by the greater majority. Since its early years and the bull run in 2017, the use of Bitcoin was very limited to small circle of innovators and early adopters. According to the theory, a critical mass is needed for the wider adoption of any innovation. Definitely, TESLA along side with other juggernauts like Paypal, Microstrategy, and Square contributed their huge financial and technological weight to the growing critical mass. Their brand names and reputation will further bolster the image of all crypto currencies worldwide and facilitate the adoption of this technology across all areas of our lives.