The price of bitcoin is surprisingly close to its former peak of 2017, causing widespread panic, fear, and desperation in the crypto market. But could the violent downward movement be a textbook zigzag correction? And if so, what does that mean for the crypto market next?
Bitcoin price action follows a deadly zig-zag pattern
Despite the narrative from 2020 that Bitcoin and cryptocurrencies had matured into an asset class, the recent crash reminded the world that digital assets remain speculative. Speculative assets are driven by pure emotion, as there are not yet ideal ways to fundamentally fix the price of Bitcoin. Most of the on-chain signals remained bullish despite falling more than 70% from the peak reached in November of last year, for example.
Price action could best be predicted based on Elliott Wave Theory, first discovered in the 1930s by Ralph Nelson Elliott. According to Wikipedia, “Elliott Wave Principle posits that traders’ collective psychology, a form of crowd psychology, oscillates between optimism and pessimism by repeating patterns of intensity and duration. These mood swings create patterns in the price movements of the markets at each degree of trend or time scale.
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Put simply, bullish and bearish phases predictably alternate through what Elliott called “waves.” The theory points out that markets move between a driving phase and a corrective phase. Driving waves are primary cycles consisting of 5 sub-waves in total. Waves 1, 3 and 5 are impulse waves in the direction of the primary market trend, while waves 2 and 4 are corrective phases. When wave 5 ends, the driving wave (a bull market cycle) transitions into a corrective wave (and a bear market).
The motive waves can take different forms and the corrections can be downright confusing. However, Bitcoin’s latest correction could be a classic zigzag correction, depending on how the pattern played out from a sentiment perspective.
BTCUSD could have completed a zig-zag correction | Source: BTCUSD on TradingView.com
Will BTCUSD finally get a relief rally?
The zigzag pattern is a 3-wave corrective pattern labeled ABC and further subdivides into a 535 pattern. The first downward movement, labeled A, is a 5-wave impulse movement based on raw emotions. Wave B is characterized as going up in this case, absorbing new bullish positions which are eventually removed as wave C goes down. C waves in a zig-zag are also impulsive moves driven by panic and fear .
When they are over, the market can go up. It’s hard to imagine at this point in the trend that a reversal is possible given the extreme change in investor sentiment, but this is often when rallies emerge from disbelief.
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Since Elliott Wave Theory focuses on patterns of investor sentiment changing from bearish to bullish and vice versa, patterns can be used for profit, but are generally not identifiable until completed and with hindsight. Is the recent downward spiral nothing more than a downward zigzag pattern that may have just ended?
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Featured image from iStockPhoto, Charts from TradingView.com
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Has Bitcoin “Zig-Zag” Shaken The Crypto Market? – Tech Tribune France
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