Bitcoin (BTC) – Experiencing a scarce period of low volatility, which is expected to be followed by an aggressive sell-off

Bitcoin (BTC) – Experiencing a scarce period of low volatility, which is expected to be followed by an aggressive sell-off

Posted on Wednesday, October 12 2022 at 8:53 pm GMT+0000

In today’s report, we follow a slightly different approach when analyzing the medium-term technical outlook for Bitcoin (BTC), as we investigate its price volatility in depth.

The crypto-king has been relatively stagnant in the past few weeks, hovering in a tight range of 18,100 – 20,500, but still holding beneath the descending trendline stretched from the August 15th top. By zooming out, however, we can see that the price has been developing within a rectangle formation for almost 4 months, specifically since mid-June. A rectangle is a horizontal Technical Analysis pattern that usually reflects a pause in the main trend.

With a brief look in mid-May, we can observe another continuation pattern that its completion sent the price lower by around 40%. During a pennant, the price pause for a few candles, and volume decreases remarkably. That pause is usually followed by an aggressive move in the direction of its preceded trend.

Noteworthy is the volatility around the aforesaid patterns. To best identify the volatility, we are using the Average True Range (ATR) that measures market volatility by decomposing the entire range of an asset price for that period. Typically, high volatility environments are followed by dour price action, while low volatility environments are usually ending with increased price action.

During the mid-May pennant, we observed a significant decline in volatility as reflected by the drop in the ATR (blue arrow), which was followed by a remarkable increase after the confirmation of the pattern. Lately, the ATR has been declining sharply since the beginning of October and the price fell almost 8% in the last few days. Notably, the indicator fell to historical lows, raising the odds that the next directional move could soon unfold. And since Bitcoin is holding near the 17,600 support and beneath the descending trendline, then that move will likely be to the downside.

If the above scenario materializes, then the crypto leader may only find its feet around the 13,000 territory, where the 161.8% Fibonacci extension level of the June – August upside correction is located.

All in all, an extended period of low volatility will always be followed by an aggressive price action. Hence, a drop in Bitcoin’s price below the 17,600 bottom will likely motivate another 30% drop.