Bitcoin technical analysis using John Murphy’s laws: (26th to 31st March)

I am never really a big fan of technical analysis, but today I want to test its effectiveness by applying John Murphy’s 10 laws of technical analysis on bitcoin. Let’s see if these laws can give a reliable prediction on the price action of bitcoin next week. I will combine some of them since they focus on the same thing, so we won’t have ten steps in our analysis.

Step 1: Mapping the trend
Murphy argues that one should look at the longer-term charts to identify the prevailing trend of an asset. By long-term charts, he means the monthly and weekly charts. Since we are looking to analyze bitcoin’s price action for next week, let’s go with the weekly chart. On the weekly chart, BTC is clearly on a longer-term downtrend. Strong selling pressure evident in the price action of the last two weeks.

Step 2: Finding support and resistance
Support and resistance are simply price levels, where the price has historically found it hard to break through. In this case, the weekly chart shows us that we are sitting on a long-term support level, at around $8100. As a matter of fact, Bitcoin seems to have formed a double-bottom on the weekly chart. You can Google that if you are not familiar with it. A double-bottom is usually indicative of an impending price reversal after price fails to break through support. At this point, we know two things, the long-term trend is bearish, but the price is sitting on a support level, which means it is about to reverse.

Step 3: Map out the retracement levels
According to Murphy, no matter the trend, price always retreats before it continues with the existing trend. As such, in a downtrend, one should sell the pullbacks, and in an uptrend, you buy the dips. To measure retracements, Murphy vouches for Fibonacci retracements. A retracement is usually in the 38-68% levels on the Fibonacci retracement tool. Anything bigger than that should most likely be considered a complete reversal, and the beginning of a new trend. So let’s test this out on Bitcoin on the weekly chart and see how it fares. Using Fibonacci’s, we see bitcoin price sitting on around the 38% level, which indicates that the current pullback is just a retracement before bitcoin continues to the downtrend.

Step 4: Use an ADX indicator
This indicator is used to test the strength of a trend. A rising one is indicative of a strong bull run, while a falling one indicates a strong dowdown trend. Let’s now apply it to bitcoin and find out the trend strength. A look at Bitcoin’s weekly ADX is indicative of a strong downward.

At this point, we can conclude that Bitcoin is on a downtrend, and selling the tops would be a wise decision.

Step 5: Find an entry point on the day charts using volumes indicator
In technical analysis, volumes on then lower timeframes indicate whether there is new money coming in to support your decision. Rising volumes indicate new money coming into the market. Let’s now look at Bitcoin’s volumes in the day chart to confirm the sell decision.

From bitcoin’s day charts, volumes are declining, which means that there is no new money in the market at the moment. As such, you need to watch out for a volumes surge, before selling.

Verdict
Let’s wait and see how bitcoin behaves next week, then we can confirm whether our analysis worked or not. If bitcoin drops, then this technical analysis process may hold water. Have a happy trading week!

PS: This information is not financial advice and must not be used to make any investment decisions. Always invest what you can afford to lose.