Summary Over the last month, Bitcoin has pushed me to watch my bullish alternate count. Bitcoin’s move higher over the last month is promising, but it hasn’t been confirmed that Bitcoin’s trend has changed. While caution is still warranted for Bitcoin bulls, there will soon be a clearer indication of whether this move higher is just the beginning. Produced by Ryan Wilday with Avi Gilburt and Jason Appel In a previous article , "Bitcoin: More Rough Waters Ahead," I focused on the possibility of Bitcoin (BTC-USD) sliding to $13,300, emphasizing that its November 2022 break of $16K opened the door to a longer bear market. I also offered a bullish alternative. In trading, it is always important to know where you are wrong. I gave the bullish alternative a low probability. But one should not be surprised by markets taking a low-probability path. Low does not mean zero, so trading with an alternative point of view in mind helps with risk management. In this article I will update my perspective on Bitcoin action, given its recent move higher. I will explain why I am not completely excited about this move. However, I am watching, cautiously, for more signs that the trend has changed. I will also refresh the tactical approach I gave in the above article, so you will know how I am dealing with this action with real money. The Forest Before the Trees Firstly, I want to zoom us out in order to see the lay of the land on the daily chart. Most know that Bitcoin has been in a strong downtrend since its top in 2021. But if you were to believe crypto traders on Twitter, or ‘CT’ as they have come to be called, a new bull market has started. CT is a notoriously emotional crowd that flips back and forth according to the size and color of candles. And January’s one-month candlestick on the Bitcoin chart has much in common with monthly candles in the bull markets of 2017, 2019, and 2021. Tweet expressing bullishness regarding Bitcoin (twitter.com) But a deep understanding of how markets trend is important for successful trading. Trend reversals are notoriously difficult to trade, because many fail. Reversals often stir excitement in the crowd, luring them in and then spitting them out. The faster the move, the more people come rushing in. There are many methods for determining a trend, and I have a few that I like to use. But for the sake of this article, I will stick to Elliott Wave analysis. In Elliott Wave analysis, generally, the trend is down if the price is under the 50% retrace of a progressing third wave. That is the level under which a chart can still form a reasonable fourth wave. On my chart, that level is $27,500. The price is still below that level, but it won’t take much to attack it. Sustaining that level is key to turning from the bearish trend of 2022 to a new bull market. When I use the term ‘sustaining’ with respect to resistance levels, generally I am looking for consolidation over that level and then another break higher. It appears that Bitcoin bulls will soon show what they are made of as $27,500 approaches. Daily Chart of Bitcoin (Motivewave software) Evaluating the Reversal In Elliott Wave we also look at the structure of a reversal, to assess its probability of success. A strong reversal starts with five waves. Further, the strongest confirmation you can get from a market occurs after the following steps. The market or asset forms five waves off a low, and over resistance, which is generally the 50% retrace of the third wave down. This structure we would call wave 1. The pullback that begins after those five waves should hold the .618 retrace of those five waves, or .764 in the worst case. At that point, a break out over the first five waves gives you more confirmation of a market bottom. With my subscribers, I like to call these three steps "the mantra." I often repeat some form of this mantra as a reversal in the crypto market forms. In fact, I repeated it many times in 2022, with each reversal. Because we never saw the completion of all three steps, it should have kept subscribers from aggressive buying. (Although each individual makes his or her own trades.) Note that confirmation should not be confused with certainty. I am not working with a crystal ball. I am analyzing the market probabilistically. As I like to say, "Certainty in markets is at all times zero." That means we have to take trades that are low risk and have high potential rewards, and stop out as needed. In Bitcoin’s January move, not even #1 above has been completed. So, while Bitcoin may be working on a bottom, the risk of another low is high. That said, this move higher is still developing. I want to point you to another artifact on the Bitcoin chart that is important. This is the potential of a wide, wave four flat on the chart that started in June of 2022. This is almost longer than a similar triangle pattern in Bitcoin in 2018, before it made its final crash at the end of that year. If you know Elliott Wave analysis, you may ask why I call this a wave four flat when Bitcoin made a new low in November. My concern is that the low was made in three waves, which suggests it is a B wave in this flat, not the final low. Potential wave four flat in Bitcoin (Motivewave software) Looking for a Solid Reversal With my concerns now out of the way, let’s turn to what I am looking for: for Bitcoin to give us a high-probability indication that it has bottomed. This starts with the three-point "mantra" above. First, we need five waves off the November low. So far, Bitcoin has given us three. However, it seems to want to hold as it consolidates in a tight range above support for the fourth at $19,900. If that level holds it should push up toward $26K, and perhaps all the way to the edge of resistance at $27,500. If that fifth wave above $26K forms, the real test for Bitcoin will be right around the corner. Naturally, it could just keep going. But generally, after a five-wave structure as clear as we would see at $27,500, a pullback begins, which I will call wave 2. If it comes down correctively and holds support, it may turn and break higher. That would give us the best confirmation we will ever get that the trend has changed. That support level will be determined after a local top is formed. I estimate it will be in the $18K region. If it pulls back to $18K, holds wave 2, and breaks out, it should work on a larger five-wave structure in the mid-$50Ks. Referencing my previous article, not sustaining a break below $16K leaves my original $125K target alive. And, the next major market top should appear near $125K. If this proves out, I'll be working from my old primary count which is now an alternate. Old primary / current alternate Bitcoin count (Motivewave software) Tactics Now let’s talk tactics. As stated in the last article, I hedged my long-term Bitcoin with a short futures position. Naturally, I stopped out of that trade. But does that mean we should go long? Over the last few weeks, I did take some long trades but they were of short duration. Now that we are moving into the fourth and fifth wave of this move, chop will increase. And it appears it already has. Bitcoin has moved in a tight range for a couple of weeks. In the fourths and fifths one should avoid aggressive trading, and size down. That said, scaling in lower in the range with quick profit-taking works well for seasoned trading. What I am really waiting for is that wave 2 pullback. If it is clearly corrective, I will look for an aggressive long position. Where I was saving cash to make more long-term buys near $13K, a corrective pullback into the $18–20K region will cause me to up the range for those purchases. And if we see a clear reversal, I will evaluate a futures trade. But it is essential to watch closely for a failure to hold the wave 2 support level, once that level is clearly determined. Failure should send Bitcoin down to an expected $13K, albeit with a very long detour. My bullish path is shown in the chart below, rendered in red. Potential bullish micro in Bitcoin (Motivewave software) Conclusion In conclusion, Bitcoin did not take my preferred path as set out in my last article, and pushed higher than expected. That move challenged the need to hedge with a short position. But Bitcoin bulls have more work to do in order to confirm that the bearish trend that started at its top in 2021 has ended. Over the next month or two I expect Bitcoin to test this recent push higher, with a move into the $18–20K region. What Bitcoin does with that region will indicate whether or not this move higher will last.
