I originally wrote this article on Nov 6, 2019. I just became an uptrennd member today. Let me know what you think. Thank you in advance
On October 25th many articles came out about the Bitcoin Death Cross and how Bitcoin was heading to a price below $6,000. A “Death Cross” for an asset occurs when the calculation of its 50-day moving price average falls lower than its 200-day moving price average. Visually, the “Death Cross” appears on a price chart when the 50-day and 200-day moving average lines intersect.
That day many commentators speculated that Bitcoin, and altcoins as well, would be trading in a bear market for the next year. https://www.newsbtc.com/2019/10/25/will-Bitcoin-death-cross-lead-to-another-year-long-bear-market/
There were many articles just like this one.
Despite of all that commentary, Bitcoin prices would go on to have an historic spike up that day, rising from $7,445 at 6 am (EST) to over $10,500 before midnight.
Earlier that morning before the spike up, I tweeted the following:
What made me so confident while many other more prominent technicians were wrong? The answer lies in trusting the analytics from our extensive research of Bitcoin trading patterns.
My son Alexander Clark Barry learned of cryptocurrency in early 2016 as a computer science major and was excited about it’s potential. On the other hand, after working at the New York Stock Exchange for 23 years, I was a stock person. During a spring break vacation that year, Alex gave me a full lesson on blockchain and cryptography; I was very intrigued. By that summer the risk allocation, 10% of my portfolio assets, were in cryptocurrency. Over the next year and a half this would lead to huge paper gains followed by the evaporation of these gains as the price of Bitcoin and other crypto currencies plummeted in early 2018.
I believe there is value in learning from past mistakes, which led the two of us to perform serious research on the movements of Bitcoin and other cryptocurrencies. Alex created various algorithms, performing back tests with past cryptocurrency data. This led to a sorting of which stock indicators worked and which did not work for crypto. Most importantly this helped create our proprietary trend signal algorithm. The goal of our algorithm is to be on the correct side of the trade when significant cryptocurrency prices changes occur. Our research showed that short term indicators were much more relevant than longer term time periods.
I also learned from our research that long term moving averages of 50 and 200 days lagged significantly for the high volatility cryptocurrency markets to identify entry and exit conditions. A “perfect storm” to apply this knowledge was brewing, more on that later.
Why some stock Indicators do not work
The short answer about why many stock indicators do not work is that cryptocurrency markets are too volatile.
Most of the time, the S&P 500 moves between -1 % and 1% during a trading day. This is true for the S&P as a whole and each component stock in its index. The largest daily increase for the S&P 500 in the past 10 years was 4.9% on Dec 26, 2018 and the largest decrease was 7% on August 8th 2011. (data from https://www.financialsamurai.com/average-daily-percent-move-of-the-stock-market/)
The goal of stock market technical indicators is to be on the correct side of the trade most of the time. If you can be on the correct side of the trade 60% of the time, when the average swing is 1%, you are doing great.
Let’s look at Bitcoin volatility. In July 2010 the Bitcoin price skyrocketed 900% in 5 days. Three times in its history Bitcoin has lost 80% or more of its value. Bitcoin rose 1,824% from Jan 1st, 2017 to Dec 15th, 2017. It is common for Bitcoin to have volatile up and down price swings of 5% or more in a single hour. Although this applies to the Big Daddy of crypto (aka highest market cap), most altcoins are even more volatile than Bitcoin, but that’s a story for a future day.
Comparing the price movements of the stock and cryptocurrency markets is like comparing the pace of a professional golf tournament to the pace of an NBA basketball game with no timeouts. In golf, changes in the leaderboard occur slowly, with a lead of 3 strokes being very significant. In basketball, it is very common see multiple lead changes with significant point swings throughout the game.
Based on the vast differences in volatility, using technical analysis tools that are fine-tuned to predict a slower price stock market should not be blindly used for the cryptocurrency markets. The frequency and size of price changes does matter.
The perfect setup
The conditions for this “perfect storm” on Oct 25th began months earlier as Bitcoin was rallying from a yearly low of $3,350 (Feb 9th) to a yearly high of $13,912 (June 26th). This set up a condition that would inflate the 200-day moving average (200 days prior was April 8th) while not being captured in the 50-day moving average.
On Sept 22nd two important events occurred: Bakkt Bitcoin option trading started for institutional investors and it was the last day Bitcoin traded above $10,000. Bitcoin price would continue to fall 16.5% during the next 24 hours to $8,185.
What was needed was a spark and that occurred on Oct 23rd; Bitcoin was down 8% for the week and hit a low of $7,295. With the 50-day moving average price falling below the 200-day moving average, aka the Death Cross, one of the best stock indicators and a proven money maker for professional stock traders was screaming: It’s time to short Bitcoin!
With the recent Bakkt option trading, shorting Bitcoin had never been easier for the professional trader. Groups of trading sharks had their hearts pumping and greed was taking over, all thanks to this wonderful Bakkt trading interface. With their orders in place it was now time to watch the SS Bitcoin take its big downward plunge.
On the morning of Oct 25th, Bitcoin was trading in a range for $7,400 to $7,500. Bakkt was achieving record volume levels and sentiment was clearly very bearish.
Technical Indicators that work for Cryptocurrency
Reliable cryptocurrency indicators will have you on the correct side of the trade for significant moves. This is the most important advice I can give when using analytics for trading cryptocurrency.
Our research of cryptocurrency shows that shorter time period technical indicators are much more important than longer time period technical indicators. On the morning of Oct 25th, four of our short-term indicators were bullish. One of them is the very simple 21-hour moving average (MA). Second is the MACD for 12 1-hour candlesticks. Both indicators are shown on the following chart, that I tweeted that morning.
The orange line is the 21-hour MA, so when the price of Bitcoin is below this line, it is bearish. When the price of Bitcoin is above the line, it is bullish. In the weekly chart above, you can see it is predicting price movement very clearly and accurately. Third, our most reliable indicator, the short-term trend algorithm, was also giving a full bullish signal. I started making my Bitcoin purchases starting at $7,500. A concern I had was waiting too long to enter buy BTC orders, as some of my orders remained open. I decided to cancel these unexecuted BTC orders and enter a market buy as the price jumped to $7,700, second guessing myself for acting too slowly. Less than 30 minutes later, I was happy to be in and ready to HODL (Hold On for Dear Life). As day moved to night, more upward spikes occurred, fueled by a short squeeze and some FOMO (Fear of Missing Out). This was a 35% historic price spike for Bitcoin.
I would go on the sell half my BTC position between $9,600 and $10,400. You may ask which technical indicator told me it was time to sell? None. I was just exercising sound practices of portfolio management, selling high after a huge gain.
Clearly the 50-day and 200-day moving average crossover is a lagging indicator in the cryptocurrency market. The perfect short position would have been entered on June 26th and exited on Oct 23rd with a gain of 48 %. We know that Oct 23rd was clearly not the time to start a Bitcoin short position as suggested by the conventional stock trading Death Cross indicator (121 days too late!)
Performing your own research is important. Don’t get caught up in the hype of a commentator that might not be a successful cryptocurrency trader.
Since we are still in the “bear” cryptocurrency market shadow of the Death Cross, the next event to watch for is the proven stock market indicator called the “Golden Cross” (when the 50-day moving average goes above the 200-day moving average). The stock market “Golden Cross” indicator is a proven bullish indicator that has been very successful for stock investors. By my calculation, this “Golden Cross” could occur in March 2020. At that point some professional stock traders may take notice and scream “It’s time to buy Bitcoin”! You can bet some serious FOMO will be occurring.
Since many experts got the “Bitcoin Death Cross” wrong, we can anticipate that they will be on the wrong side if they continue to apply stock indicators to cryptocurrency trading. That will be the clear sign to consider getting out of your positions and be careful of the cliff ahead.
Trading & TA
Trading & Technical Analysis