How Far Will Bitcoin Fall?

Bear markets are interesting. People love talking about them, but don't really know how to identify them and take advantage of them. 

Technical analysis is a flashy term for looking at charts to make your investment decisions. The uneducated often dismiss it as hocus pocus, but it is an analysis process with a rich history that goes back to the dawn of the financial markets. 

Two benefits of technical analysis that will help you see improved performance in your portfolio are:

• Easily establishing a bias to price action as either bullish, bearish or neutral. 
• Identifying key turning points in the market, known as support and resistance levels. 

These concepts are easy to grasp, so let's break them down. 

Establishing A Bias

This is the foundation of making an investment decision. It is essential to identify environments that increase the chances of making a profit over a loss. When it comes to technical analysis, the daily 200 simple moving average (d200sma) was established early on as a good indicator of the long-term trend. 

If the price of an asset was trading above the d200sma, it has a bullish bias. This is when you look for potential long opportunities. 

If the price of an asset was trading below the d200sma, it has a bearish bias. This is when you look for potential short opportunities. 

Easy, right? This logic has not changed today. Institutions still use it, and so do private investors like myself, whose primary approach is to follow long-term trends. 

Below I have the daily timeframe of Bitcoin. The black line is the d200sma. 

The 40% move up since the low of January has taken place below the d200sma, giving the price a bearish bias. Notice the swings up and down, making this a very difficult environment to see any growth. 

If you are looking to buy into Bitcoin, this is the time to stand aside and protect your capital until the price has moved above the d200sma. Once a trend has been confirmed above the d200sma, this offers an environment to buy where you have more chance of making a profit than a loss. Again, simple, right? 

This takes us to point No. 2. 

Identifying Key Turning Points

Also known as support and resistance levels, these levels identify where a market could reverse or continue. 

A support level, think of it as a ceiling, is where the price is forced to move from an uptrend to a downtrend. 

A resistance level — think of it as a floor — is where the price is forced to move from a downtrend to an uptrend. 

In the above chart, you may have noticed a turn in price from up to down this week, with the d200sma acting as resistance. In addition to the d200sma being used to establish the bias of the price, it is also a proven level of support and resistance. 

We now see Bitcoin in an interesting position. 

If the d200sma holds strong as resistance, we could see the price weaken to the low of January, which will be a major level of support. If the low of January is taken, we could see the price push toward the 2021 low. 

Yet if the price manages to push through the d200sma, we could see the price target the all-time high. 

You may have an opinion, a strong one too, on what you think the price will do next, and this may drive how you are currently investing or trading bitcoin. 

Yet one of the first rules of trading/investing is to ignore opinions, including your own. It is far simpler to let price dictate what course of action to take. 

For now, the price of Bitcoin is telling me that it is trying to work its way up in an overall bearish environment. The trend direction of the price and the overall bias do not marry, so I am standing aside until the price has dictated a firm bullish or bearish bias AND direction to the market.