Take Bitcoin Technical Bullishness with a Grain of Salt

On May 12 technical analyst Walter Zimmerman of United-ICAP made a bold predicition concerning the ever-so-volatile bitcoin market. Looking at the chart of BTC’s price and volume over the past few months, Zimmerman claims the charts show the digital commodity is at the tail end of a falling wedge, and had fallen to far from its support line That is, its price is due to break out, and the 41 percent drop BTC has experienced this year is due to reverse, sooner rather than later.

However, the price action of bitcoin could merely be continuing its fall less in line with a technical breakout pattern, and more in line with a deflating bubble. And while the technical indicators might support the assertion that BTC is due to pop, Zimmerman has made similar predictions on much larger markets in the past. And reality ended up not really giving much “support” to those claims either.

Falling Wedge or Descending Triangle?

Here’s the chart Zimmerman uses to argue BTC is due to break out of its doldrums.

Zimmerman claims BTC has “become tracked to resistance,” saying that this price action mirrors what happened in April 2013, when BTC experienced it’s a bubble and bust that saw prices climb to the $250 USD range before crashing down below $80.

The beauty of technical analysis is that you can draw the lines wherever you see fit. Zimmerman decided to pick the $400 for the bottom of his wedge – that is, during a brief blip in the middle of bitcoin’s late 2013/early 2014 pop.

But if we go back a few months further, say, when BTC hovered below $100 after the April 2014 mini-bubble, but prior to the breakout, the wedge looks quite different. In fact, it doesn't look much like a falling wedge at all.

In this scenario, while BTC has been holding in the $400-$450 range for a couple weeks, it would look less like a falling wedge and more like a descending triangle. Or that is, with a chance of not breaking up, but down, with the price of bitcoin returning to the $100-$200 range by the end of summer 2014.

It should be noted as well that Zimmerman used the same technical analysis in 2011 to predict a stock market crash in 2012. That year, the S&P did not lose value, and gained 12 percent prior to its 2013 break out.

What happens to BTC’s price is hard to pinpoint, and while there are several indicators that its price could be set to pop, citing a falling wedge as Zimmerman does requires looking at a select set of data, while ignoring another story that is far less optimistic on BTC retaining the stratospheric highs it saw late last year.