Bitcoin’s Bollinger bandwidth reached a mulit-month low today. Does this signal impending … [+]
Bitcoin prices have been trading in a reasonably well-defined range lately, but could a multi-month low in the value of technical indicator presage a coming breakout?
The world’s most prominent cryptocurrency has been moving largely between $30,000 and $42,000 since late May, according to CoinDesk.
Earlier today, CoinDesk reporter Omkar Godbole wrote about the digital asset’s market conditions, emphasizing one specific technical indicator:
“Bollinger bandwidth, a measure of volatility calculated by dividing the spread between the Bollinger bands by the 20-day average of the cryptocurrency’s price, has declined to a 2 1/2-month low of 0.15,” he stated.
Similarly low readings of this indicator came before significant increases in volatility, noted Godbole.
[Ed note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]
Bollinger Bandwidth Considerations
However, a low Bollinger bandwidth does not, in and of itself, signal an impending breakout, analysts pointed out.
“Bollinger Bands illustrate market volatility and a narrowing of the Bollinger bandwidth is a way of visualizing the decrease in volatility in recent weeks,” said David Keller, chief market strategist at StockCharts.com.
“In general, periods of lower volatility usually precede price breakouts. We saw that with Bitcoin and narrow Bollinger Bands in October 2020 and December 2020 before large price increases, and we also saw that in April 2021 right around the top for Bitcoin.”
William Noble, the chief technical analyst of research platform Token Metrics, also commented on the situation.
“Bollinger Band width is a good gauge as to [how] long, or how painful, a range trade has become. With bitcoin BBW crashing to .15 you have a numerical manifestation of the boredom bitcoin traders are living with.”
“BBW can sometimes crash and stay at low levels for up to a month,” he added.
“Low BBW doesn’t guarantee the range will end soon.”
Consulting Additional Indicators
When looking at Bollinger bandwidth, market observers can benefit significantly from checking other technical indicators, said Noble.
“When using Bollinger Bands, you want to look for a reversal candlestick,” he stated.
“If bears try and force the market down, but bulls make a dramatic counterattack that same day, that is the sign that bulls have control and the range could end.”
“The same goes for the downside,” Noble added.
“For example, if bitcoin is in a tight range and there is a sudden breakdown because of a problem in the stock market, the sudden shock of the down move can send bulls running for cover.”
Katie Stockton, the founder and managing partner of Fairlead Strategies, LLC, also weighed in, stating that:
“I would always cross-reference any tool with other indicators.”
She noted that when Bollinger bands “contract, it’s time to watch levels closely.”
“So, I’d be watching the 50-day MA and 30K for a breakout/breakdown, with a breakout more likely (in my work) from an overbought/oversold perspective.”
Stockton wasn’t the only one who spoke to potential downside, as Keller also offered some input on the bearish price action the digital asset might experience in the near future.
“Overall, the chart of Bitcoin remains in distribution mode, with lower highs and lower momentum through much of 2021,” he stated.
“Bitcoin has remained below a downward-sloping 50-day moving average since May, indicating overall price weakness. The tight Bollinger Bands suggests a breakout is imminent, and the patterns of distribution suggest that break will most likely be lower.”
“Look for $30,000 to remain an important area of support, and a break below $30,000 could open the way to the next downside objective around $27,000,” Keller emphasized.
Disclosure: I own some bitcoin, bitcoin cash, litecoin, ether and EOS.
