BTC/USD is trading beneath its 50 day moving average today as I write this, that average is now at $780. Coupled with the high volume on the downside, especially in the last 10 days,  this is solid evidence for a reversal of the short term market trend from up to down.

I think that BTC/USD will drop 200 dollars from here down to the long term support, my long term VWAP calculated using last one year of data.

If I am right about this the prognosis calls the bottom should develop as a conseguence of the MtGox drama, that exchange (if we can call it an exchange…) is almost out of business, my guess is that it is down of bitcoins and with strong manipulations of the price they are trying to recover the money lost due to the malleability issue from their own customers, this practice is of course totally illegal in a regulated market, i don’t want to go in the details but looking MtGox price and volume data there is a strong evidence of such activity.

Back to our long term chart, is this the start of a bear market? I think it is too early to tell. The 200 day moving average is around my long term VWAP  so a drop under it would be the first clue that a bear market has begun. Also the other kind of average i use, the ALMA moving average, turned negative during the prolonged trading range of January.

I added a new indicator, similar to my “net volume” indicator, the only difference is that it computes the ratio between buyers and sellers and it has been remarkably accurate staying in bearish territory since November top; it looks good as a trend following tool.

For the short term i think the price is now in a congestion in the $520-$720 price zone, a strong bottom where to shake out all weak hands is necessary and very healthy in my view and  if  this event will be accompanied by MtGox going out of business indefinitely, then the bitcoin market will be ready to move up again.

As i thought the trading range has been broken after 30 days, it’s very unlikely to see more then that for a market congestion and with no exception this market respected this common rule. For the majority of the time prolonged trading ranges resolve with a strong break to the downside once the smaller trading ranges are broken.

I’ve now two support levels, 640 and 515 dollars for the short term and i think that in this price zone some buyers will show up. For the long term supports are on my long term VWAP ($400) and the 200 days moving average now at $420.
Many are arguing that we are falling because of MtGox, i don’t agree with this view, it’s just an excuse to sell we all know that MtGox is out of business since months. When the market is in low sentiment regime good news are ignored and overreactions to bad news from investors are common.

Congestion occurs when four consecutive bars open or close within the range of a “measuring bar”. A “measuring bar” becomes such when its price range contains the opens or closes of at least three of four subsequent price bars. As i said in one of my old post sideways price movement may be broken into three distinct and definable areas:

1. Ledges – less than 10 price bars
2. Congestions – 11-20 price bars
3. Trading Ranges – 21 bars or more with a breakout usually occurring before the thirtieth bar

Now 13 days are gone without a breakout above or below the “measuring bar” (i consider the bar of last 7 January the measuring bar) and we are in a congestion; I don’t think the market is still following the triangular descending pattern that I mentioned in the previous update.

I expect to see a breakout in the next 5-10 days, unlikely that this congestion will last more then 20 days in a volatile market like this. Top of the congestion rectangle is the first deviation line of VWAP around $930, while the $765 static support just below the VWAP defines the bottom of the trading range.

I think that without a really bad news investors will not sell their precious bitcoins under $750, I believe that the positive sentiment of the market will slowly push prices higher outside the current congestion, possibly above $900 and toward new highs but this process will require some time.

The market in the last few days has done what I was expecting, it hesitated and dropped down to the support, the VWAP positioned at $ 765, here it slowly climbed back up to $ 900. Now we have two resistances, 920 dollars and 1067. 

I expect a little more resistance to advance this time but if it passes the psychological threshold of $ 1,000 it could also go beyond 1067$ (second deviation line of vwap) and it might try to attack recent all time top at 1163$.
The “net volume” oscillator  has been a bit  weak lately, at the end it can be considered neutral and is not yet seriously a danger to the current rise of prices.
For those who are invested for the long term I suggest to keep your position open for now. Stoploss should be positioned below long term VWAP now at 375$.

A couple of days ago one of my reader asked me about price and volume divergence, i decided to answer to him with this post talking again about it.

All the readers that follow me since 2011 know that i use a “net volume” indicator to understand the activity of buyers and sellers, it is computed taking the difference of a security’s uptick volume minus its downtick volume over a specified period, here i compute it on a daily basis with a 7 bars summation  (an entire week because it’s a daily chart). 

Often traders use such an indicator to judge the momentum or trend of a security in order to make assumptions about its future price movements. Net volume is an indicator that is also very similar to the idea of money flow and its indicator, the money flow index.

Now BTCUSD is hesitating around a price resistance (first positive deviation line of VWAP) but net volume is positive and till it remains positive i do not expect to see stronger down movements in the price, although we might see some consolidation beetwen the VWAP at 765$ and the actual price of $900.

What we are seeing is a decent rally that it is still emerging from a severe December drop; i expect to see some resistance around the first deviation line at $900, it’s the same deviation line that marked the top at $980 before the crash down to $382.

The RSI oscillator is overbought,  when this occurs, the Market almost never makes a final high. That means the Market will most likely go higher in the medium term so it could be a good idea, for anyone wanting to buy into the currency, to buy at market and place a stoploss below the current VWAP level ($733).

The net volume activity is positive, finally, after more then 30 days of bearish volumes; it’s a first confirmation that the BTC/USD is headed towards further highs.