What the Heikin-Ashi happened with Bitcoin?!
According to Dan Valcu, author of Using the Heikin-Ashi Technique, "the heikin-ashi is a visual [trading] technique that eliminates irregularities from a normal chart, offering a better picture of trends and consolidations." Roughly translated from Japanese, heikin-ashi means "average-foot", or "balanced-foot." The heikin-ashi can be calculated and plotted using the formula below. Looking at the heikin-ashi chart can help us start off on a good foot, especially post-Halving. In this article, I describe how to use the heikin-ashi technique, then apply it to the Bitcoin daily chart, and touch on some additional indicators.
Heikin-ashi candle calculations.
How is heikin-ashi used?
Dan outlines five different types of trend behavior for both ascending and descending trends (see below). A trader can learn these trend behaviors to identify the direction of a trend and when consolidation is occurring. It is helpful in identifying the starts and stops of upward and downward trends.
Dan Valcu's five heikin-ashi scenarios.
Essentially, heikin-ashi candles are start and stop. The first two scenarios are fall in the "start" category. In scenario one, there is either an up or a down trend, but it is normal, or not too strong of a trend. In scenario two, the given trend is stronger and is represented by longer bodies with long shadows, or wicks, only going in the same direction. These are the "start" scenarios because the candles are moving in one direction, either ascending or descending.
Scenarios three and four fall in the "stop" category. In scenario three, the given trend starts to slow. This is evident by smaller bodies and the emergence of wicks going the opposite direction of the trend. In scenario four, movement up or down has ceased. Candles have small bodies with both upper and lower wicks. These are the "stop" scenarios because the candles are slowing down and shrinking in preparation for the next move. I will not touch on scenario five since is considered not too reliable. I will leave up to the reader to review. Now that I have reviewed what the heikin-ashi technique is and how it is used, I will apply it to the Bitcoin daily chart.
Bitcoin and heikin-ashi
As is clear from the heikin-ashi chart below, Bitcoin has been in an upward trend since mid-March. There have been only four, including today's candle, instances of an identifiable downward trend (i.e., end of March, mid-April, and early-May). Compare this chart to a typical chart (below). One will notice more instances of a red candle in the regular chart. This is because the heikin-ashi technique cancels out the noise and balances out the trend.
Heikin-ashi Bitcoin chart.
Regular Bitcoin chart.
The current heikin-ashi candle is clearly a scenario two type, or a "start" type. It is a long candle, with a wick going in the same direction, and no wick in the opposite direction. A similar trend formed in week two of May. Judging by what happened before, it looks like there is more downtrend coming. Until the current candle begins to look like the third red candle in week two of May, I do not expect the downward trend to weaken. In other words, when the candles begin to look like a scenario three or four, I think the downward trend will slow. For now however, it looks like Bitcoin has started a downtrend.
Heikin-ashi Bitcoin chart, May 2020.
Now that I have looked at the heikin-ashi Bitcoin chart, I will touch on some additional indicators as a supplement to the heikin-ashi analysis.
On Twitter, many have cited the golden cross that is happening on the current charts. It it true, it is there. It is outlined in the moving averages below (i.e., 50-day, orange; and 200-day, green). However, I am not placing too much weight on it because when I zoom out, I see that there was another golden cross not to far back. This leads me to believe there has not been enough time between each golden cross for it to really mean much. Especially when compared to the previous peaks Bitcoin has had in the last year.
The golden cross.
There was a golden cross that occurred in mid-February which was followed by the COVID-19 pandemic. That golden cross did not do much to the price of Bitcoin. However, a whole year back, when prices peaked in June 2019, that was a true golden cross. These last two appear to be duds.
Golden cross zoomed out.
Price has been riding the upper band and has now crossed over the middle band. Price failed to break past the upper BB (white) during the last peak. Price is currently in the lower band. It will confirm the downward trend spotted by the heikin-ashi technique once price closes in this area.
The Fibonacci retracements are showing there is support at the 23.6% Fibonacci area at $8,622.30. Price looks like it is headed that direction or lower. I would consider this area as strong support if the price were to bounce off it again. Should price close below this area, I expect price to hit the next Fibonacci level at 38.2%.
Chaikin Money Flow
The CMF is showing that the buying momentum has been waning. The CMF line is clearly in a downward trend and is approaching the zero line. Should the CMF hit the zero line, or lower, it will be clear there is increased selling pressure. I think this is likely to happen given that the CMF has also broken its previous upward trend.
Chaikin Money Flow.
The MACD has been on the upside for some time now. I am not surprised to see it in the current condition it is in. The MACD has peaked and the MACD line (blue) has crossed the signal line (red). Anytime this occurs, it is generally considered a sell signal. Additionally, the MACD line is becoming more divergent from the signal, especially today. This to me is a signal that downward moment is likely to accelerate.
In this article, I reviewed what heikin-ashi candles are and how they are used. I then applied it to the daily Bitcoin chart and touched on some indicators. The heikin-ashi technique identified the start of a downward trend in the price of Bitcoin. This was confirmed by several indicators such as a broken 20-day moving average and divergence between the MACD and signal line. Price is likely to find support at the 23.6% Fibonacci level, or the lower Bollinger Band around the ~$8,600 area. Should price break past this area, I expect Bitcoin to hit the following support level around ~$7,888. Any move to the upside would have to break past the $10,000 area and find support. Before Bitcoin achieves this, I think price is in for more corrections.
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