Bitcoin Trading Alert: Strong correction and possible rebound

Crazy week, huh? Bitcoin is firmly in the scope of mainstream media, and the recent very volatile action makes it only a better story. On Bloomberg, we read: Bitcoin resumed its tumble on Thursday after South Korea said it was eyeing options including a potential shutdown of at least some cryptocurrency exchanges to stamp out a frenzy of speculation.

South Korea has been ground zero for a global surge in interest in bitcoin and other digital currencies as prices surged this year, prompting the nation’s prime minister to worry over the impact on Korean youth. While there’s no immediate indication Asia’s No. 4 economy will shutter exchanges that have accounted by some measures for more than a fifth of global trading, the news is a warning as regulators the world over express concerns about private digital currencies.

Bitcoin fell as much as 9% to as low as $13,828 in Asia trading, erasing modest gains after the South Korean release, composite Bloomberg pricing shows. The cryptocurrency had retraced some of its losses by 10:13 a.m. in London, trading down 4.5 percent to $14,505. That puts the drop from a record high reached last week at about 26 percent.

While South Korea is an important market and recent stories showed that local traders were willing to pay high premiums for Bitcoin, we don’t generally think that the whole market action is driven by what’s happening in Korea. We rather think that the hectic behavior in Korea is a result of the recent appreciation and is fueling it to a lesser extent than might be presented in media stories.

We would actually expect to see even more stories on Bitcoin in the future. Some of them will follow the “Bitcoin appreciated/depreciated because of X” where it might be really hard to assess whether this is even remotely close to the actual situation in the market. In our opinion, the current market conditions are of extreme emotions and fundamental factors might only influence the market to the extent they shift expectations.

For now, let’s focus on the charts.

On BitStamp, we saw a very sharp correction and then a possible rebound? What might this mean for the Bitcoin market? In our recent comments, we wrote:

The price action we have seen since then has mostly turned the very short-term outlook around. This means that the perspective for the next couple days seem a lot more bearish than bullish now, mostly based on momentum and the action visibly below the previous all-time high. The volume on which this move has taken place has been relatively strong. This also contributes to the bearish very short-term outlook. But is the situation changed enough to consider hypothetical shorts at the moment?

What we saw in the days following the publication of our last alert was actually strong depreciation. Bitcoin went down to around $11,000 (slightly above this level) and the local bottom was completed on strong volume, to say the least. The fact that such a strong move down was followed by a rebound might suggest a bullish outlook. But is this the case? The move up took Bitcoin to over $16,000 before the currency turned back south, not decisively. Is this all a bullish suggestion?

On the long-term Bitfinex chart, we very clearly see the all-time high, the strong move down and a possible rebound. Recall our previous alert:

About the Author

Mike McAra is a quantitative analyst focused on the economic reality, not theoretical models. His investment thinking is grounded on empirical evidence and common sense. Mike joined Sunshine Profits in 2009. He develops innovative investment tools, verifies usefulness of popular techniques, and provides thorough internal research. His quantitative and financial background, along with experience in the gold market and personal interest in bitcoin led to the launch of our Bitcoin Trading Alert service.