Originally published at I-System Trend Following on Friday, 14 May 2021.
Bitcoin has been one of the favorite objects of trading speculation in the recent years: it’s vaulted over six million percent with compound annual return of more than 200% every year since 2009 (h/t Raoul Pal).
Even just in the last 12 months, it has gone up from under $10,000 to over $63,000. However, in the last few weeks Bitcoin’s ascent has flashed a few significant warning signs.
First, the correction after the April peak made a new trough that was lower than the previous one:
The next rally proved weaker than the previous one, creating a lower new peak:
Yesterday (13 May 2021) Bitcoin broke through the “neckline” of the Head-and-Shoulder pattern that appears to be forming:
While yesterday’s decline was exacerbated by Elon Musk’s latest pronouncement on cryptocurrencies that market reaction wasn’t the first sign of weakness for Bitcoin.
A six-min. video discussion is included below:
Recall, trends always correct and reverse. As trend following cynics would say: trend is your friend until it bends in the end! We've seen this with Bitcoin repeatedly already: the most recent rally in Bitcoin took off only in October 2020, but this was after nearly three years of very volatile sideways action that included an 80% plus peak-to-trough drawdown. Namely, after it peaked in December 2017 at $19,345 it staged a massive correction and by December 2018 it dropped to $3,229 - 83% below the previous peak!
We can't predict where Bitcoin will go from here but investors should heed the danger signs since we're still trading at dizzying highs!
Is Bitcoin ripe for systematic trend following?
Bitcoin has now accumulated more than ten years of price data – to my mind the bare minimum required to even contemplate formulating systematic strategies. But Bitcoin presents another difficulty: its price history consists of a handful of hockey-stick rallies interrupted by long periods of decline and consolidation. On that ‘terrain,’ any trend following strategy that captures profits from those hockey-stick intervals will appear like a winner. This makes it difficult to separate the wheat from the chaff so it is too early to talk about high-conviction strategies for Bitcoin. Having said that, I believe that systematic trend following is still preferable and safer than discretionary trading.
I have now formulated a set of I-System trading strategies for Bitcoin and added ten of them to our USA PLUS! portfolio. Here are the signals that yesterday’s price action produced:
The above strategies span long-cycle, medium-cycle and short-cycle trends. Even though four of them now reversed to the short side, their cumulative exposure is still net long, albeit a minimal one. Without a doubt, further down closes will gradually tip the strategies over to the short side but only time will tell if the current fluctuations are tracing the beginnings of a major reversal – or a minor hickup for Bitcoin.
Read full article here.
Alex Krainer – @NakedHedgie has worked as a market analyst, researcher, trader and hedge fund manager for over 25 years. He is the creator of I-System Trend Following and publisher of TrendCompass reports based in Monaco. His views and opinions are not always for polite society but they are always expressed in sincere pursuit of true knowledge and clear understanding of stuff that matters.
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