Technical Analysis: The calm before the storm

Calm Before The Storm by tennant.graeme on

After the bloodbath which followed the SEC’s decision to put plans for a Bitcoin ETF on ice, the market appears to have calmed down over the past week. In fact, by crypto standards it has been a decidedly unremarkable week for Bitcoin with the price hovering around $6400 for the past few days.

Crucially, the price bounced off the all-important $5800 support zone (green), but since then has been content to meander sideways, unable to push decisively through the resistance zone (orange). During periods like this, it can be tempting to dismiss the market as calm or stagnant and switch off from potential trading opportunities. This can be costly, as low volatility generally precedes impulsive, violent moves. Ergo, the calm before the storm!

Use of the Bollinger Bands indicator is very useful to identify moments of low volatility also known as volatility squeezes. A volatility squeeze (red circles) occur when the two outer bands are drawn close together. As can be seen on the chart, previous occurrences of a volatility squeeze is followed by an impulsive move in either direction. Compared to these previous examples, we could still potentially squeeze further, but there is no doubt the bands are tightening at this point in time.

There is a bullish divergence signaled by the RSI which is a momentum indicator. Whilst the price fell over this period, the RSI moved higher (red arrows). This signals a loss of downside momentum and a high likelihood of a reversal which is what has transpired. It is encouraging to see such a clear reversal signal above the all-important $5800 support zone. Furthermore, there is a potential head & shoulders setup, albeit a messy one that you won’t find in the textbook. Nevertheless, the price has made higher highs and higher lows and that’s all a head & shoulders pattern really pattern is.

In summary, should the volatility continue to squeeze tighter I’ll be looking to place a long break order position in anticipation of a break to the upside. A long break order is a buy order placed above the current price. Therefore, my buy order will only trigger after an upside breakout. If this scenario plays out, I expect the momentum from the volatility squeeze to be strong enough to see the price push through the resistance zone. From here there is a fairly clear run to the resistance trendline where I will look to take profit.

A ship cannot sail without wind and trader cannot make money without volatility. In crypto, one seldom has to wait long before the breeze begins to pick up once again.

Happy trading!

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