It’s been a rough few days to be bullish for bitcoin, but the technicals indicate the pain will be easing soon. The chart below is the BTC/USD exchange rate on Mt. Gox for the last week using 1 hour candles. As I write this article Bitcoin is just below $100. There are three characteristics of this chart that indicate the first bullish signal in a long time: a capitulation bottom, 2 closes over the 21hour EMA, and a crossover of the 7EMA and 21EMA.
1) Capitulation Bottom:
Capitulation occurs when investors give up all hope, and just want to get out of the investment. It usually coincides with a large amount of panic (indicated by the heavy volume). True capitulation occurs when the last investor says screw it, and sells out the rest of their account. At that point, the tone of the market becomes more positive, and it can begin to recover. In the above graph there is a clearly visible bottom occurring simultaneously with a spike in volume.
2) 2 Closes over the 21 hour Exponential Moving Average
Additionally, we can see there are 2 candles that close over the 21-hour exponential moving average (EMA) shown as a blue line. This is a rolling average of the last 21 hour’s price. Being below this line indicates we’re in a downtrend since the current price is lower than the average has been. You can see on the chart above that this has been a point of significant resistance, and we have not been close a candle above it since the crash began.
3) Moving Average Bullish Cross-over
This third sign hasn’t quite happened yet (but most likely by the time you’re reading this it will have). This acts similar to the candles closing above the moving average, and acts as an additional confirmation of the trend. You can see that the faster moving average (the 7-hour EMA in orange) has been consistently below the slower (21-hour EMA in blue) for the past several days. This would be a bullish cross-over, and an indicator that the trend is about to reverse. In a bullish market, as values are rising, the faster MA is consistently higher than the slower MA – since the most recent prices are higher than older ones. As the bullish-crossover occurs, the short term trend is becoming more bullish than the longer term trend has been in the past.
Hopefully this will bring some stability to the market, although when Mt. Gox is actually working these last couple days have been a trader’s paradise.
Update: Here’s another view of the capitulation bottom that may be easier to see for people not used to candle charts:
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