Bitcoin’s daily volume spike could create a necessary condition for a breakout. Traded price ranges continue to constrict.
Bitcoin’s Bullish Pennant — The Symmetrical Triangle
To understand the relevance and importance of the triangle pattern that exists on Bitcoin’s chart, we need to first understand the behavior of that triangle itself. There are a number of triangle patterns that can be identified in technical analysis. The most well-known are symmetrical, ascending and descending triangles. But these patterns can be broken down into even more specific patterns such as a running triangle, busted triangles, and others. The identification of a triangle is based upon the angles of the two converging trendlines. A flat-top trendline with a rising bottom trendline would create an ascending triangle while a flat bottom trendline and a falling upper trendline would create a descending triangle. The interpretation can be different according to where you draw those trendlines. You will often find two different types of triangles if you draw one set of trendlines from the wicks and then another set of trendlines from the bodies. Bitcoin shows a symmetrical triangle when drawn from the wicks, but a descending triangle when drawn from the bodies. Which do you use? Personally, I only draw from the bodies if the wick is more of an anomaly than an ‘honest’ representation of the traded range of that candle. In other words, the symmetrical triangle that you see on a great many charts these days is, in my opinion, the appropriate pattern. Knowing that we have a symmetrical triangle is one thing, now it’s time to identify the behavior of this pattern. In the study of chart patterns, there is no expert greater than Thomas Bulkowski. He is the author of the Bloomberg Financial Series book, Visual Guide to Chart Patterns, as well as Chart Patterns After The Buy and, what I believe to be one of the greatest technical analysts books out there: Encyclopedia of Chart Patterns. He also has several patterns that are trademarked! Bulkowski has a breakdown of known patterns and assesses with a ranking system, statistical performance behavior and required criteria for identification.
According to Bulkoswki, a symmetrical triangle in a bull market was two performance ratings. The rank for a bullish breakout is 52 out of 56 while a bearish breakout is 38 out of 53. The average rise from a bullish breakout is 34% vs 12% for a bearish breakout. On both directional breakouts, there is a 62% and 65% (respectively) throwback/pullback rate. The percentage chance that a bullish target is met is 58%, 36% for a bearish target. From that information, we can see that even in a bull market, symmetrical triangles seem to be weighted more heavily towards a bearish breakout — but the range of that move is quite limited and the chance of it meeting its price target from that bearish breakout is significantly lower than the bullish breakout.
Some of the key identifying factors that Bulkowski lists are, first, the convergence of two trendlines with the bottom trendline sloping up and the upper trendline sloping down. Additionally, price must travel between those two trendlines without a lot of ‘white space’ (open space). He also indicates that price must touch one trendline at least three times and the other at least twice. Volume tends to decrease 86% of the time. An upward breakout occurs 60% of the time at 73% of the way to the triangle’s apex and 74% for a downward breakout. He also says that patterns that have a breakout with volume above the 30-day average have a better chance of playing out with a favorable outcome and that throwbacks and pullbacks hurt the post-breakout performance.
The chart above is the symmetrical triangle on Bitcoin’s daily chart. Utilizing the information from Bulkowski’s work, we can identify some of the key components that we want to see for a breakout of this symmetrical triangle. First, we want to know if price has touched the trendlines at least 3 times on one line and at least 2 times on the other. Letter A shows at least three touches (possibly 4) for both the uptrend and downtrend lines. Next, we want to know if the volume has been above the 30-day average. The volume for September 19 th, 2019 was above that average (Letter B). Ideally, we want to see volume grow as we get closer to the breakout and then we should see it grow even more on the breakout. And third, we want to identify where 73% of the range from the beginning of the triangle to the apex. Letter C shows where that 73% range is at: September 24 th, 2019 — a coincidence that it shows up one day after the Bakkt Futures launch?
But we also want to know how far Bitcoin would move on a breakout. To do that, Buklowski also provided some tips. To do this, we need to subtract the high of the triangle from the low and then multiply it by the average percentage move. Then we add it to the breakout price level for a bullish target or subtract for a bearish target. Since we don’t have a breakout price level yet, we could hypothesize a value from our current trading date. Taking the high of the range at $13880 minus the low of the range at $9,049.54 we get $4,830.46. Multiply that by the average bullish breakout rise of 34%, we get 1,642.35. Assuming we were to breakout higher near the $10,750 value area, then the target from the breakout would be $12, 392.35. On the bearish side of things, we do the same thing except instead of multiplying the high and low by 34%, we multiply it by 12% (4830.46 * 0.12 = 579.65). Assuming we broke down below the $9,400 value area, then we would see a target lower at $8,820.35.
Given all of this information, the most likely scenario would see play out, given the probabilities, is for price to actually breakdown lower and tag the bearish breakdown price target of $8,820.35 before pulling back into or above the triangle to trade higher. Remember: in a bullish symmetrical triangle there is a higher chance for price to experience a bearish breakout, but the downside risk is very limited and the pullback rate and failure rate for a bearish breakout is very high. Essentially, we will be looking at a highly probable bear trap before another leg higher towards the 2019 highs.