I've been doing some reading about Auction Market Theory lately, and have tried to apply those concepts to what we're seeing in Bitcoin. Let's do some hindsight volume profile analysis to try and get a sense of potential outcomes for the future. No need for fractals, just pure theory at play between the interaction of buyers and sellers.
Looking at the volume profile from its BTC's run up from March 2020 to its peak in May 2021, we see a very nice bell curve shaped distribution of BTC transacting between $30k-$41k. It also spent 30 days within this range. In a trending market, especially a crypto trending market, 30 days can be considered a decent chunk of time where BTC's price is being accepted between buyer and seller. This area is known as consolidation. In markets, there are really two types of moves:
1. Trending
2. Consolidation / Ranging
When the market is in consolidation or has a range, and spends a significant amount of time there, it means that buyers and sellers can agree that a certain asset is fairly priced. With enough time, one side of the market participant will overpower the other and change the market from consolidation -> trending. The market then shifts from a balanced one to an imbalanced one. Here volatility and volume tend to pick up...and will reach a point when ultimately buyers and sellers find balance. A balanced market is a ranging market.
Now let's apply these ideas to what we've seen in BTC:
If we assume the $65k move was a deviation from BTC's fair value, the market was out of balance. In the end, sellers exhausted buyers and we've moved back into our one month area of consolidation between $31k-$40k. What does the volume profile look like in the right shoulder?
We see that most of the volume is traded between the levels $34.5k-$40.3k. This area is known as the Value Area, where 68% of the volume is traded (or 1 stdev). On June 15th, bulls made an attempt to push price beyond the Value Area High (VAH), but bears quickly brought it back into the Value Area. By June 20, the bulls defending the Value Area Low (VAL) in an attempt to bring the market back to balance. The doji candle wasn't enough, and bulls got flushed out below the VAL decisively into this years open. From June 22-24, we've attempted to break back into the Value Area but the daily now shows a very strong rejection off the VAL. It's not unusual for an asset to move below a VAL, and perform a retest, before heading lower.
BTC has been ranging at this level for over a month, perhaps it wants to establish a new range to trade in? It will need volume to break out of its current range though. I read somewhere that a trader said this range has become too obvious to trade with. I tend to agree that we should never trust obvious technical signs since the overcrowded opinion tends to get invalidated. The longer BTC price hangs underneath the VAL, the more doom and gloom it becomes. It means that market participants do not think BTC should be worth mid $30ks and it will soon find a new price to find balance in. Looking at the volume profile, we saw thin liquidity from $41.6-$46.4k, which explained the sharp selling from May 14 - 18. Buyers probably tried to step in at the lower bound of that volume distribution around $42k and got blown out. Over leverage in the system + chinese news of crypto regulation + Elon Musk tweets basically caused a crash all the way through the lower bound of the volume distribution in the left shoulder. It quickly bounced off $30k and since then has established the range between $30k and $41k.
Let's imagine BTC trends lower in the coming days. Where do we want to place our bids? Well I personally don't think there's enough leverage in the system to have a repeat 50% crash from $30k. If we look at the volume profile, we see a small chunk of liquidity around $27k and significant liquidity around $23k. This seems like a very plausible scenario to me:
Trap the bulls hoping for a bounce on the $27k region, continue to trend lower into the next High Volume Node (HVN). Support would flip into resistance, and we could establish a new range between $23k and $30k. That range is a 30% differential, lower than our current range which is 40% between lower and upper bounds. This would fit in nicely with the fact that volatility ultimately is decreasing in a bear market. Volume would also probably drop off. $23k would place BTC at 65% from its ATH. I wouldn't call that a capitulation event though. The avg cost for buyers in 2020 are around $10k. They would still more than +1x from their cost basis. I could see a capitulation event be when 2017 ATH gets swept.
Good luck traders. Always be prepared for that unlikely scenario, it's where most of the money is made.
Looking at the volume profile from its BTC's run up from March 2020 to its peak in May 2021, we see a very nice bell curve shaped distribution of BTC transacting between $30k-$41k. It also spent 30 days within this range. In a trending market, especially a crypto trending market, 30 days can be considered a decent chunk of time where BTC's price is being accepted between buyer and seller. This area is known as consolidation. In markets, there are really two types of moves:
1. Trending
2. Consolidation / Ranging
When the market is in consolidation or has a range, and spends a significant amount of time there, it means that buyers and sellers can agree that a certain asset is fairly priced. With enough time, one side of the market participant will overpower the other and change the market from consolidation -> trending. The market then shifts from a balanced one to an imbalanced one. Here volatility and volume tend to pick up...and will reach a point when ultimately buyers and sellers find balance. A balanced market is a ranging market.
Now let's apply these ideas to what we've seen in BTC:
If we assume the $65k move was a deviation from BTC's fair value, the market was out of balance. In the end, sellers exhausted buyers and we've moved back into our one month area of consolidation between $31k-$40k. What does the volume profile look like in the right shoulder?
We see that most of the volume is traded between the levels $34.5k-$40.3k. This area is known as the Value Area, where 68% of the volume is traded (or 1 stdev). On June 15th, bulls made an attempt to push price beyond the Value Area High (VAH), but bears quickly brought it back into the Value Area. By June 20, the bulls defending the Value Area Low (VAL) in an attempt to bring the market back to balance. The doji candle wasn't enough, and bulls got flushed out below the VAL decisively into this years open. From June 22-24, we've attempted to break back into the Value Area but the daily now shows a very strong rejection off the VAL. It's not unusual for an asset to move below a VAL, and perform a retest, before heading lower.
BTC has been ranging at this level for over a month, perhaps it wants to establish a new range to trade in? It will need volume to break out of its current range though. I read somewhere that a trader said this range has become too obvious to trade with. I tend to agree that we should never trust obvious technical signs since the overcrowded opinion tends to get invalidated. The longer BTC price hangs underneath the VAL, the more doom and gloom it becomes. It means that market participants do not think BTC should be worth mid $30ks and it will soon find a new price to find balance in. Looking at the volume profile, we saw thin liquidity from $41.6-$46.4k, which explained the sharp selling from May 14 - 18. Buyers probably tried to step in at the lower bound of that volume distribution around $42k and got blown out. Over leverage in the system + chinese news of crypto regulation + Elon Musk tweets basically caused a crash all the way through the lower bound of the volume distribution in the left shoulder. It quickly bounced off $30k and since then has established the range between $30k and $41k.
Let's imagine BTC trends lower in the coming days. Where do we want to place our bids? Well I personally don't think there's enough leverage in the system to have a repeat 50% crash from $30k. If we look at the volume profile, we see a small chunk of liquidity around $27k and significant liquidity around $23k. This seems like a very plausible scenario to me:
Trap the bulls hoping for a bounce on the $27k region, continue to trend lower into the next High Volume Node (HVN). Support would flip into resistance, and we could establish a new range between $23k and $30k. That range is a 30% differential, lower than our current range which is 40% between lower and upper bounds. This would fit in nicely with the fact that volatility ultimately is decreasing in a bear market. Volume would also probably drop off. $23k would place BTC at 65% from its ATH. I wouldn't call that a capitulation event though. The avg cost for buyers in 2020 are around $10k. They would still more than +1x from their cost basis. I could see a capitulation event be when 2017 ATH gets swept.
Good luck traders. Always be prepared for that unlikely scenario, it's where most of the money is made.
Comment:
Comment:
Not much has happened. Volume and volatility trending lower, still below the right shoulder POC.
Big move will happen sooner or later. Prepared for the downside, which seems to be higher probability given lower highs below composite POC.
Big move will happen sooner or later. Prepared for the downside, which seems to be higher probability given lower highs below composite POC.
Comment:
Volatility getting really tight, usually follows with a big move. Many participants watching for a breakout to either side to make a trade. I think whichever side it breaks, it will be met with heavy leverage. I can definitely see a scenario to rinse out any early leveraged traders and just go the opposite direction from liquidiations:
Comment:
Just as an update:
Moved lower, bounced off the VAL + weekly support. Volume still decreasing...how much longer until we get a drastic move?
There needs to be a catalyst to move lower. I don't think there needs to be a catalyst to move higher though. Seller exhaustion at these lows could be convincing enough. We are spending more and more time near the bottom range without extending beneath 30k. The fact that it has broken 30k and wicked into 28k shows aggressive buying at those values below VAL. So buyers have already proven themselves once. If we did not have a wick into 28k, I would be even more bearish. But since the bulls have shown strong buying competition, it could mean that bears don't have enough selling power in them to go lower. Basically bears have time against them, not bulls.
Moved lower, bounced off the VAL + weekly support. Volume still decreasing...how much longer until we get a drastic move?
There needs to be a catalyst to move lower. I don't think there needs to be a catalyst to move higher though. Seller exhaustion at these lows could be convincing enough. We are spending more and more time near the bottom range without extending beneath 30k. The fact that it has broken 30k and wicked into 28k shows aggressive buying at those values below VAL. So buyers have already proven themselves once. If we did not have a wick into 28k, I would be even more bearish. But since the bulls have shown strong buying competition, it could mean that bears don't have enough selling power in them to go lower. Basically bears have time against them, not bulls.