by Jamie Holmes
Margin traders bearish on bitcoin at Bitfinex are becoming emboldened, with the open short interest surpassing the long interest for the first time in almost two months. The dip in BTC-USD, which fell from around $1230 to $1141 since April 11, could be short-lived with the cryptocurrency getting ready to jump to fresh highs if contrarian speculation takes hold.
The daily price action for BTC-USD on the Bitstamp exchange, displayed below, shows that the market may just be squatting before jumping to fresh highs above $1229.00. Bears dominated the price action on April 13, bringing bitcoin to a low of $1141 but the Ichimoku cloud held as a support zone, with buyers pushing the closing price up to $1172.91.
Also, notice that the market respected the support level as indicated by the conversion line (blue), which stood at $1170.00 on April 13. A close of that candlestick in particular below this level would have given the first bearish signal indicating a longer-term downward trend. However, this signal was not obtained, suggesting that the likelihood remains greater for a move to the upside for BTC-USD over the long run.
For April 14 the conversion line, which also indicates short-term equilibrium as opposed to long-term equilibrium signaled by the Ichimoku cloud, has moved higher from $1170.00 to $1181.68, providing another signal the market will trend higher in the coming days. Uptrends are accommodated by a rising conversion line whereas downtrend display a falling conversion line. For instance, notice that since March 31, the conversion line and the price of bitcoin have been rising in tandem.
The Ichimoku cloud projected ahead has also changed color, suggesting a long-term uptrend is forming. The cloud has changed from red to green and we look to buy in the area of the thick red Ichimoku cloud, as this zone should provide support going forward.
While there are many bullish signals from the daily chart, there are two reasons why BTC-USD may fall further to long-term equilbrium around $1120. The conversion line has moved above the price action, so the close on April 14 needs to be higher than $1181.68, otherwise downward momentum will start to take hold. Secondly, notice that for April 14-18, the Ichimoku cloud below providing support is very thin. This indicates if the market moves south, the support will be easily taken out and the next support is provided around $1060 by the base line (red).
Consequently, we set limit sell orders at $1124.67 for April 14-18 only, as a break below the Ichimoku cloud should point to further losses for bitcoin. Also, the relationship between the market price and conversion line is unclear at the time of writing. We require a daily close above $1181.68 on April 14 to strengthen a bullish outlook, as the conversion line will continue as support. However, a close below the conversion line will mean that it turns into resistance, with the next support found at the thin portion of the Ichimoku cloud.
As reported by MarketWatch, bitcoin bears are boldening their bets the cryptocurrency will fall in value, with open short interest on Bitfinex surpassed long interest on Thursday for the first time since February. As the article notes, "The last time shorts eclipsed longs, the bitcoin price gained nearly $300 over the following three weeks, rising from $993 on February 13 to an all-time high of $1,285."
With such activity from margin traders on one of the world's largest exchanges, there is speculation that bitcoin could attempt at new all-time highs. For instance, the CFTC's Commitment Of Traders (COT) report released weekly provides details on short interest for forex pairs and commodities and traders use this information to analyse the market. Short interest is analyzed because it leaves assets vulnerable to a 'short squeeze.' In a short squeeze, investors who bet against the asset are forced to buy it back to close out their positions at a loss, causing the price to move sharply in the opposite direction.
In summary, if we listen to the market, the daily price action shows that bitcoin could indeed be squatting and preparing for a jump to fresh highs. An important support level held on April 13, providing bulls with hope. However, BTC-USD needs to move higher above $1181.68 and hold these gains on April 14, otherwise a key support level will turn into resistance, providing further impetus for downward momentum. If bitcoin manages to remain above the conversion line, then we should see the market move above $1229.00.