Disclaimer
Trade at your own risk. Do not take this blog as investment advice. I am not your financial advisor and I do not know your circumstances and profile as investor. Although, I always make sure that the data I use is accurate and my analysis is based on my technical knowledge, I make no representation that my prediction will happen. Information posted here should be treated only for educational purposes.
So I decided to migrate this post from Noise.cash to Read.cash to enable me to articulate fully my thoughts on the future directions of Bitcoin Cash (BCH). The first post I made was about the short-term trend of BCH and what we could expect for our favorite crypto for the last week of January and first week of February, 2021.
In chart analysis, it is always best to look at the big picture before delving into smaller timeframe because it is always a smart trading strategy to invest or trade towards the direction of the trend instead of against it. As the first rule of the thumb in trading, always remember that the trend is your friend. Another reason, we have to look at the forest instead of the individual trees so that we suffer from tunnel vision wherein we become focused with minute details and end up ignoring what is happening in our bigger environment.
The Big Picture
To be more objective about my analysis of BCH, let us look at a longer time frame. We will start in August, 2017, when BCH was created through a fork of Bitcoin, and when it reached also its all time high.
In December 2017, BCH reached $3971.50 from its initial price $746.70; a whooping 431.874% increase in just 4 months! From that peak, it went into downtrend the following year. There's a saying in technical analysis that once you reached the top, there is no way but to go down. This has equivalence in mathematics and statistics, where trends regress to the mean once they reached the peaks or bottoms. It was natural and expected that BCH will go that after reaching that price.
From a downtrend, BCH went into consolidation mode from January 2019 to April 2019 until it rallied and reached $513.97 in June, 2019. After reaching that price, it went down again and tested to break, albeit unsuccessfully, that same resistance area in February 2020.
The trend reversal that we saw last December, 2020 was the Golden Cross of 3 EMAs (20, 50 and 200) which indicates bullish reversal. A golden cross is a technical term when short-term moving average crosses above the long-term moving average.
The Short-term Trend
We will now look into the price action of the BCH to understand its behavior the past several days. In Jan. 11, 2021, we saw a massive selling pressure which drove BCH price low which even reached the 20 EMA support level, the yellow line. Again, this happened because it attained a high price, higher than the previous years which were at around $500. As expected, there were profit-taking. From a technical analysis point of view, the BCH was overbought with an RSI over 70. Take note that whenever BCH reaches over 70 RSI, selling pressures come in. This happened 5 times in current history of BCH.
Zooming into the previous 4 weeks of BCH trading, we can notice that a symmetrical triangle has formed. According to Investopedia, a symmetrical triangle is a chart pattern characterized by two converging trend lines connecting a series of sequential peaks and troughs. These trend lines should be converging at a roughly equal slope. I interpret the convergence of the candle sticks into a narrow tunnel as indecision waiting for the trigger that will determine the short-term direction of the trend. The trigger came in Jan. 21, when a red candle stick broke outside the triangle and the 20 EMA. The current price range of $425-450 is being supported at EMA 200. I still expect that the short-term downtrend bias is still there. The BCH can still go down lower at 200 EMA, which coincidentally is also the 61.80% level of Fibonacci retracement, where I expect a lot of buyers are waiting for a bargain.
What we see right now as selling pressure every time BCH reaches over $600 is just a normal profit-taking behavior. Remember an uptrend is composed of series of higher highs and high lows. The trough we are seeing now is the first higher low of a bullish uptrend. In technical terms, this is a bull flag. So short-term, it is on a downtrend but long-term, the trend is still intact.
Long-term prospect of Crypto currencies and BCH
The long-term prospect of Crypto currencies and BCH is positive and potentially long-lasting. To support my claim, I combined my analysis of the volume of BCH with the analytical framework regarding Diffusion Theory. Let us look at the volume first. As shown by the chart below, the volume of BCH transaction during its early days was low compared to what it has now. Then from 2019-2020, we show a huge spike in the volume which tells me that there is an interest in BCH. The volume continues to increase as we speak. The increase in volume can be attributed to increase of institutions buying crypto currencies. In previous blog, I mentioned 3 such institutions.
According to Everett Rogers, the scholar who popularized the Diffusion Theory, adopters can be grouped into 5 categories:
Innovators -Innovators are willing to take risks, have the highest social status, have financial liquidity, are social and have closest contact to scientific sources and interaction with other innovators. Their risk tolerance allows them to adopt technologies that may ultimately fail.
Early Adopters - These individuals have the highest degree of opinion leadership among the adopter categories. Early adopters have a higher social status, financial liquidity, advanced education and are more socially forward than late adopters. They are more discreet in adoption choices than innovators. They use judicious choice of adoption to help them maintain a central communication position
Early Majority - They adopt an innovation after a varying degree of time that is significantly longer than the innovators and early adopters. Early Majority have above average social status, contact with early adopters and seldom hold positions of opinion leadership in a system
Late Majority - They adopt an innovation after the average participant. These individuals approach an innovation with a high degree of skepticism and after the majority of society has adopted the innovation. Late Majority are typically skeptical about an innovation, have below average social status, little financial liquidity, in contact with others in late majority and early majority and little opinion leadership.
Laggards - They are the last to adopt an innovation. Unlike some of the previous categories, individuals in this category show little to no opinion leadership. These individuals typically have an aversion to change-agents. Laggards typically tend to be focused on "traditions", lowest social status, lowest financial liquidity, oldest among adopters, and in contact with only family and close friends.
The reason why I cited the work of Rogers is to explain the variances in the volume of transaction of BCH. In 2017, despite reaching the all time highs in just a matter of several months, the volume was flat. This indicates to me that the innovators and early adopters were the ones driving the price higher. If such were the case only and without popular support, any kind of innovation would not succeed. This we saw when the price of BCH fell from ATH. In the following months, volume picked up demonstrating that people knowledgeable of BCH and crypto currencies, in general are increasing. These people are the early adopters. These early adopters though were not strong enough to drastically change the trend of BCH. Probably, many were just accumulating.
I believe we are seeing the entry of late majority which are now driving the price higher. Financial institutions and government agencies are now take note of Crypto currencies and this attention is generating so much interest among the public. I also would like to point out that successful partnership of the innovators and early adopters with early majority in Finance, Social Media, the Web as also triggers for popularity of crypto currency in general. The late majority are still crucial in the wide adoption of crypto currencies because they have the financial, political, social and technological muscle to share the long-term future of crypto currencies.
This post was originally posted by yours truly in Club1BCH in Noise.cash
References:
https://www.investopedia.com/terms/s/symmetricaltriangle.asp
I have seen your post sa noisecash that's why I'm here :))