This is a beautiful looking idea that captures my general sentiment of the market. We noted bearish divergence between 7th of May and 1st of June. We noted hidden bullish divergence between 11th of May and 24th of May. These ideas themselves have already expired. Yet, drawing them on the chart reveals a channel on both Bitcoin's price as well as on its RSI.
Bitcoin's price reveals a rising channel while its RSI reveals a falling channel. I will be so direct as to say that I would put more weight on the RSI formation. In general, you would expect a rising formation to break downwards more often than not. However, in this case, that assumption would be mitigated by the falling formation on price's RSI. A falling formation would be expected to break upwards more often than not.
Please bear in mind there still exists a chance both formations break downwards.
The bearish case
A daily close below 8700. This would confirm a lower low on Bitcoin's price. It would also indicate a breakdown of its channel. Possibly the start of a downtrend. Further targets 8100, 7400, 6700.
Note that a daily close below 8700 alone is unlikely to also break the RSI formation. In fact, the RSI formation may test its bottom support and hold firm, turn around and break upwards. This could draw a nasty fakeout on price action itself.
The bullish case
An RSI close above 64. This would confirm a higher high on Bitcoin's RSI. The channel on the RSI would then be breaking out upwards. I went to some lengths to crunch numbers on this. My hypothesis is: RSI breaking upwards out of its channel would precede Bitcoin's price breaking upwards out of its channel.
A close today at 9800 yields an RSI value of 56.5,
a close today at 10250 yields an RSI value of 60.5,
a close today at 10733 yields an RSI value of 64.
This goes against my hypothesis. But I'm not daunted. Assume today closes sideways. Then,
a close tomorrow at 9800 yields an RSI value 56.75,
a close tomorrow at 10250 yields an RSI value 60.94,
a close tomorrow at 10646 yields an RSI value 64.
What I'm really trying to determine here is: after how many days of sideways price action would a close above 10250 yield an RSI value of 64 or higher? The answer is 7 days (*), which is satisfactory because the assumption of pure sideways price movement is quite extreme. Any slightly upwards movement in price would quickly reduce this number.
Now, we arrive at the scenario I saw in my head at the start of all this. I have also confirmed this scenario to be within reason, just not immediately today or tomorrow. Within around 7 days of mostly sideways, slightly upwards price movement, we may see the RSI break upwards out of its channel while price remains below 10250. This would make the picture perfect signal.
Targets 10250, 10750, 11500, 14000, ...
Be reminded that there always remains a chance that Bitcoin's price has a catastrophic meltdown.
(*) I use my own personal Python scripts to compute these hypothetical scenarios. The method used was really as simple as to add x amount of days with the same, sideways close (9520 at time of writing) and then a close of 10250 to ultimately obtain an RSI of 64.09 for x=7. Intermediate values were for 1 day 60.94 (as above), 2 days 61.4, 3 days 61.9, 4 days 62.4, 5 days 64.9 and for 6 days 63.5.
You may still wonder why it makes sense to simply copy the same close. That is because in any risk-neutral pricing model (such as the probably best-known Black-Scholes model), the expected (average) price in the future is the current price itself. These models are not perfect, thus this line of reasoning can not be perfect. But it has proven to be able to give pretty good estimates.
Bitcoin's price reveals a rising channel while its RSI reveals a falling channel. I will be so direct as to say that I would put more weight on the RSI formation. In general, you would expect a rising formation to break downwards more often than not. However, in this case, that assumption would be mitigated by the falling formation on price's RSI. A falling formation would be expected to break upwards more often than not.
Please bear in mind there still exists a chance both formations break downwards.
The bearish case
A daily close below 8700. This would confirm a lower low on Bitcoin's price. It would also indicate a breakdown of its channel. Possibly the start of a downtrend. Further targets 8100, 7400, 6700.
Note that a daily close below 8700 alone is unlikely to also break the RSI formation. In fact, the RSI formation may test its bottom support and hold firm, turn around and break upwards. This could draw a nasty fakeout on price action itself.
The bullish case
An RSI close above 64. This would confirm a higher high on Bitcoin's RSI. The channel on the RSI would then be breaking out upwards. I went to some lengths to crunch numbers on this. My hypothesis is: RSI breaking upwards out of its channel would precede Bitcoin's price breaking upwards out of its channel.
A close today at 9800 yields an RSI value of 56.5,
a close today at 10250 yields an RSI value of 60.5,
a close today at 10733 yields an RSI value of 64.
This goes against my hypothesis. But I'm not daunted. Assume today closes sideways. Then,
a close tomorrow at 9800 yields an RSI value 56.75,
a close tomorrow at 10250 yields an RSI value 60.94,
a close tomorrow at 10646 yields an RSI value 64.
What I'm really trying to determine here is: after how many days of sideways price action would a close above 10250 yield an RSI value of 64 or higher? The answer is 7 days (*), which is satisfactory because the assumption of pure sideways price movement is quite extreme. Any slightly upwards movement in price would quickly reduce this number.
Now, we arrive at the scenario I saw in my head at the start of all this. I have also confirmed this scenario to be within reason, just not immediately today or tomorrow. Within around 7 days of mostly sideways, slightly upwards price movement, we may see the RSI break upwards out of its channel while price remains below 10250. This would make the picture perfect signal.
Targets 10250, 10750, 11500, 14000, ...
Be reminded that there always remains a chance that Bitcoin's price has a catastrophic meltdown.
(*) I use my own personal Python scripts to compute these hypothetical scenarios. The method used was really as simple as to add x amount of days with the same, sideways close (9520 at time of writing) and then a close of 10250 to ultimately obtain an RSI of 64.09 for x=7. Intermediate values were for 1 day 60.94 (as above), 2 days 61.4, 3 days 61.9, 4 days 62.4, 5 days 64.9 and for 6 days 63.5.
You may still wonder why it makes sense to simply copy the same close. That is because in any risk-neutral pricing model (such as the probably best-known Black-Scholes model), the expected (average) price in the future is the current price itself. These models are not perfect, thus this line of reasoning can not be perfect. But it has proven to be able to give pretty good estimates.
Comment:
Those 7 days have now passed and we received exactly the slideways/slightly upwards price movement that we needed to validate the previous calculations. Any considerable upwards move may now break Bitcoin's RSI's channel and foreshadow a test of the upper resistance on Bitcoin's channel.
Trade active:
So Bitcoin's price did come down to test the channel support. I did take this as a good enough excuse to get long at 8925. Notice Bitcoin's RSI is barely halfway its own channel. *If* we confirm a low here, that *would* confirm a third drive of hidden bullish divergence.
Comment:
We actually closed too high (above 9218) which made it technically impossible to form hidden bullish divergence. Which is kind of funny.
Trade closed: target reached:
I closed 2/3rds of my position around 9500, yielding 2% profit and leaving 1% at risk.
Trade closed manually:
Closed the rest of my long at 9300 as the likelihood of (at least) retesting the bottom support is increasing.