Just why do parabolic moves often reverse so spectacularly?
Parabolic market moves are those which reflect exponential increases in a price. They are obvious on a chart because, rather than being a straight line, they curve upwards with the angle of ascent increasing as more time passes. BTC has been in a parabolic move for the last few months, and is now retracing from the highs even faster than it climbed. This is typical for parabolic market moves. Why is this?
In a normal market with a reasonably static number of participants buying and selling, once a trend forms the price tends to respect that trend, often in the form of a channel where the increase takes place between two parallel lines on a chart, as illustrated by the Apple chart.
In a market where there is a large influx of new people entering the market however – such as Bitcoin recently – the top of the channel is constantly ‘overridden’ by new buyers flooding in, resulting in a new, steeper channel. This process repeats, with the excitement of the move feeding the frenzy as people jump on the bandwagon – until the trend is going up almost vertically.
This is the most exciting point, and is when most people buy, lured by the speed at which the underlying asset is growing. As a result the greatest number of market participants buy in the latter stages of the move.
Eventually there aren’t quite enough buyers left to continue defying gravity, and there’s a pause. Seeing this pause, some of the people who bought at the bottom of the gigantic move start to get a little nervous about their new found stash, and think about taking profits. This causes a little selling pressure and the price starts to drop a little.
Since most people in a parabola buy in the latter stages, this immediately causes those who bought at the top to be underwater. Some of them panic, causing further selling pressure and depressing prices. At every price level there are people who bought, and as the price keeps falling they each in turn start to sell – making it a self-fulfilling prophecy.
Evolutionary biology has made fear of loss an even more potent force than greed, so the sell-off tends to be even steeper than the rise.
Where next for Bitcoin?
The million BTC question is ‘will the 200 day moving average hold’. This moving average, the blue wiggly line marked on the chart below, is a classic long-term bull-bear line. Bitcoin hasn’t been underneath it since 2015 when BTCUSD was under $250.
Now it has overshot this moving average, and just bounced back above it on high volume, indicating lots of buyers stepped in yesterday. The question is will it hold – the 200 is at $7910. If Bitcoin stays above that, we may have seen the bottom.
If, however, Bitcoin drops back underneath the 200 daily moving average, then we are looking at a likely retrace to one of the following support levels (blue horizontal lines shown on the chart above).
- $4400 area
- $3000 area
As well as those support levels, the various other weekly moving averages come into play in that scenario as additional support. The first of the ‘big ones’ is the 100 week Exponential Moving Average, or EMA, which is a type of moving average that is similar to a simple moving average, except that more weight is given to the latest data. Bitcoin’s 100 week EMA is just under our $4400 mark, so I see that level as offering super strong support.
Finally, if you’re despairing, you may want to have a look at this third chart. This is a very possible super long term uptrend on BTC, with price targets for 2019 and 2020. Note that that channel is currently between $3000 and $4500 approx.
The parabolic moves out of the top of the channel make it a little tricky to spot, but if this proves correct, the long-term future is bright for hodlers, even at deepest darkest February’s lows.
Remember, not only do most people buy at the top, most people sell at the bottom.
BitcoinBro has no position or opinion on the price of Bitcoin or any other cryptocurrency and this article should not be construed as analysis of or advice regarding the current or future market price of Bitcoin or any other cryptocurrency. No analysis of the price movements of BTC or any other cryptocurrency provided by BitcoinBro should be construed as an invitation or inducement to buy, sell or otherwise to trade BTC or any other cryptocurrency.