Bitcoin had a fantastic rally this year but also had seen the worst of the falls due to China’s crackdown. Let’s analyze the BTC chart and find out the critical signs we have observed during the fall and also analyze what’s the current situation.
In this analysis, we will be using Trendlines, Supply and Demand Zones, and RSI. We shall understand them briefly.
Trendlines can be ascending or descending lines. The trendlines are formed using at least 2 tops or bottoms. Ascending lines are formed by joining at least 2 higher highs or 2 higher lows which act as support. Descending lines are formed by joining at least 2 lower lows or 2 lower highs which act as resistance.
Applications of Trendlines:
1. They indicate the prevailing trend in the particular duration.
2. They act as support and resistance lines.
3. If ascending trendlines are broken to the downside and the immediate low of the rally is broken then the stock may have a new downtrend.
4. Similarly breaking the descending trendlines to the upside and an immediate high of the prevailing fall indicates the new uptrend.
Supply and Demand Zones are the zones where the price is failing to break out multiple times. Supply zones are the areas of interest for the bears and demand zones are the areas of interest for the bulls.
Applications of Zones:
1. They represent the critical areas in the chart where the traders or investors are interested.
2. Breakouts in either direction will add momentum in that direction.
Interesting Interpretation of Trendlines and Zones:
1. Ascending trendlines are joined by the points where bulls are interested to go long.
2. Descending trendlines are joined by the points where bears are interested to go short.
3. Similarly demand and supply zones are zones where bulls and bears are interested in long and short respectively.
4. Giving up trendlines and prices going below or above immediate level indicate that the bulls or bears have given up on the stock for a while.
Important Note:
The breakout should be confirmed by checking higher volumes or pull backtest or waiting for the price to take out immediate high or low. This confirmation gives us a confluence between the different schools of thought. Some traders may only follow trendlines for breakouts, some may follow zones, these checks ensure you have more participation towards your position.
Once the trendline or a zone is broken the nature becomes opposite. For example, if a supply zone or a descending line is broken, the price rises and then comes back to test the zone, this time it must act as a demand zone or support line, else it is said to be failed in the pull backtest.
Relative Strength Index (RSI)
It is a momentum indicator of the price in a particular duration. For detailed definition and formula, please check in the indicators section in TradingView.
It is generally used to determine whether the stock is oversold or overbought.
Applications of RSI:
1. Oversold if the price reaches 20 or 30.
2. Overbought if the price reaches 80 or 70.
3. Reversal signs based on divergences. If price is making higher highs or higher lows but on contrary RSI is making lower highs or lower lows. Then it is a sign of bulls giving up and a bearish reversal is on its way.
Let us these concepts and apply to our chart.
You can see supply and demand zones and the trendlines on the chart.
FALL
The supply zone had been tested four times and then took a great fall. You can have a doubt that actually once the price had managed to breakout supply zone with good volumes and crossed immediate higher high but even failed. Yes, here it failed the pullback test. It received resistance from the purple trendline 1 and came back for the pullback test and failed. We can see a bearish divergence by checking corresponding highs trendline 1 connected in RSI. RSI was also indicating overbought signs.
After a certain fall, it rose again to test the zone which now turned to supply zone and couldn’t break. This gave confirmation for the participants of different schools of thought, hence with huge volumes price fell.
RISE
The price reached another critical area called the demand zone. Before falling into the demand zone, the purple trendline 2 gave support to the fall. The corresponding trendline 2 in RSI confirms the bullish divergence and showing oversold signs. This reversal was confirmed by huge volumes, taking out the 40k mark and breaking a strong trendline which resisted price to rise during the fall. The price also took a pullback test and succeeded.
CURRENT SITUATION
After a pullback, BTC made a high of 48k and then formed an intermediate demand zone. The blue trendline is supporting the rise. If the BTC breaks 48k, it can go to test the supply zone. If it breaks the blue trendlines and the intermediate trendline, it can test the 37k level. If the 37k level fails it may test the demand zone again.
We have a minor bearish divergence in RSI and RSI is in the overbought zone.
As we analyzed the fall and rise of BTC, we understood before considering any position, confirmation is necessary.
This is just an education post and not investment advice.
In this analysis, we will be using Trendlines, Supply and Demand Zones, and RSI. We shall understand them briefly.
Trendlines can be ascending or descending lines. The trendlines are formed using at least 2 tops or bottoms. Ascending lines are formed by joining at least 2 higher highs or 2 higher lows which act as support. Descending lines are formed by joining at least 2 lower lows or 2 lower highs which act as resistance.
Applications of Trendlines:
1. They indicate the prevailing trend in the particular duration.
2. They act as support and resistance lines.
3. If ascending trendlines are broken to the downside and the immediate low of the rally is broken then the stock may have a new downtrend.
4. Similarly breaking the descending trendlines to the upside and an immediate high of the prevailing fall indicates the new uptrend.
Supply and Demand Zones are the zones where the price is failing to break out multiple times. Supply zones are the areas of interest for the bears and demand zones are the areas of interest for the bulls.
Applications of Zones:
1. They represent the critical areas in the chart where the traders or investors are interested.
2. Breakouts in either direction will add momentum in that direction.
Interesting Interpretation of Trendlines and Zones:
1. Ascending trendlines are joined by the points where bulls are interested to go long.
2. Descending trendlines are joined by the points where bears are interested to go short.
3. Similarly demand and supply zones are zones where bulls and bears are interested in long and short respectively.
4. Giving up trendlines and prices going below or above immediate level indicate that the bulls or bears have given up on the stock for a while.
Important Note:
The breakout should be confirmed by checking higher volumes or pull backtest or waiting for the price to take out immediate high or low. This confirmation gives us a confluence between the different schools of thought. Some traders may only follow trendlines for breakouts, some may follow zones, these checks ensure you have more participation towards your position.
Once the trendline or a zone is broken the nature becomes opposite. For example, if a supply zone or a descending line is broken, the price rises and then comes back to test the zone, this time it must act as a demand zone or support line, else it is said to be failed in the pull backtest.
Relative Strength Index (RSI)
It is a momentum indicator of the price in a particular duration. For detailed definition and formula, please check in the indicators section in TradingView.
It is generally used to determine whether the stock is oversold or overbought.
Applications of RSI:
1. Oversold if the price reaches 20 or 30.
2. Overbought if the price reaches 80 or 70.
3. Reversal signs based on divergences. If price is making higher highs or higher lows but on contrary RSI is making lower highs or lower lows. Then it is a sign of bulls giving up and a bearish reversal is on its way.
Let us these concepts and apply to our chart.
You can see supply and demand zones and the trendlines on the chart.
FALL
The supply zone had been tested four times and then took a great fall. You can have a doubt that actually once the price had managed to breakout supply zone with good volumes and crossed immediate higher high but even failed. Yes, here it failed the pullback test. It received resistance from the purple trendline 1 and came back for the pullback test and failed. We can see a bearish divergence by checking corresponding highs trendline 1 connected in RSI. RSI was also indicating overbought signs.
After a certain fall, it rose again to test the zone which now turned to supply zone and couldn’t break. This gave confirmation for the participants of different schools of thought, hence with huge volumes price fell.
RISE
The price reached another critical area called the demand zone. Before falling into the demand zone, the purple trendline 2 gave support to the fall. The corresponding trendline 2 in RSI confirms the bullish divergence and showing oversold signs. This reversal was confirmed by huge volumes, taking out the 40k mark and breaking a strong trendline which resisted price to rise during the fall. The price also took a pullback test and succeeded.
CURRENT SITUATION
After a pullback, BTC made a high of 48k and then formed an intermediate demand zone. The blue trendline is supporting the rise. If the BTC breaks 48k, it can go to test the supply zone. If it breaks the blue trendlines and the intermediate trendline, it can test the 37k level. If the 37k level fails it may test the demand zone again.
We have a minor bearish divergence in RSI and RSI is in the overbought zone.
As we analyzed the fall and rise of BTC, we understood before considering any position, confirmation is necessary.
This is just an education post and not investment advice.
