Long Term Update: 2018 Outlook with entropic methods

Every beginning of a new year i post an outlook using entropic methods explained in the technical section of this blog. Here you can find the 2015, 2016 and 2017 forecast update, where you can find more information about this approach.

Updated values for bitcoin (in brackets values of last year) using daily data since August 2010 (average of 4 exchanges when possible).

 BTC/USD
Growth Factor G 1.0028 (1.0007)
Shannon Probability P 0.5384 (0.519)
Root mean square RMS (see this as volatility) 0.059 (0.045 )

Bitcoin’s entropic values versus the Usd strongly improved in 2017 but volatility increased a bit, despite this the Growth Factor (G) increased up to 1.0028% (remember that volatility is detrimental to the Growth Factor) compounded daily or 280% yearly up from 30% of 1y ago. Also the optimal fraction of your capital to invest in bitcoin improved in 2017 with a 7.7% instead of 6.4% of 1y ago.

 2018 Price forecast  Full volatility  Half volatility
Forecast using only G* ~38700$ ~38700$
Upper bound adding volatility ~121000$ ~68000$
Lower bound subtracting volatility ~12300$ ~21800$

*38700 is obtained with today price (around 13800$) times (1.0028^365)=~2.77
13800*2.77=38740, just change 365 with the number of days you prefer for a different forecast.

It’s interesting to notice that with reduced volatility the support level is above the actual quote of XBTUSD (13800$ at the moment i’m writing) because the growth factor (G) is very high and is skewing everything to the upside. If volatility stays low the uptrend should push bitcoin above 22k USD during the year without too much effort, it’s a scenario i prefer instead of wild price swings.

What went wrong in 2017?

A year ago, I forecasted a top of $2900, reached in July 2017 with an intermediate Top well ahead of the end of the year. I tried to double the volatility factor (rms) to see the next level after a reader asked me about the possibility that bitcoin was in a bubble above 2900$. The next level was around 6000$, again this new level has been broken at the end of October.
The last 2 months have been crazy and the explanation is a huge change in shift in this market happened in March 2017 (with altcoins literally exploding) that basically erased the reliability of the January 2017 forecast. I think that this year forecast should be more accurate compared to last year.

Conclusions

For this year i think that i’ll consider the support/resistance levels obtained with a full volatility value with the result to have for the whole 2018 a good probability to stay inside the 12300$-121000$ price zone.
At the same time i think that at the end of a strong buying climax period, if any, it will be wise to reduce your bitcoin investment if the price goes above 60k-70k USD.

I’m at your disposal for any questions; see you at the next update and Happy New Year!

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Long Term Update: new support area

kama
Weekly Chart BTCUSD – KAMA V1.2 Average + Price Deviation Bands

This is the last version of my KAMA indicator (public at tradingview) with default settings tuned for BTCUSD weekly chart.

In the previous two occasions the first deviation line held well the drop, notice how in the recent November bottom the price was at an intermediate level between the Kama and the first negative line, an high bottom interpretable as a strong signal followed by a strong top (~19600$)

At the moment the bottom is around 11k usd, done again at an intermediate level while the 7500$-9000$ support area is defined by the 1st and 2nd deviation line.
This support area should work especially if the market goes sideways, it could be a nice zone where to buy with reduced risk of high initial drawdown.

There are no guarantees that the market will stay sideways enough to test that support area but strategically isn’t a bad move to buy inside it with a stoploss below 7000$.

Quantitative Analysis of Altcoins, part III

In part I and II I did a quantitative analysis on altcoins and possible strategies on how to capitalize on their weakness compared to bitcoin.

In Part III we will see how to allocate a portfolio starting with Fiat currencies.

In the table below you will find cryptos with relative gains (G) and volatility (RMS) against the dollar using all the historical data available, as data source was mainly used  poloniex and bittrex exchanges, for bitcoin has been used Bitstamp.

In red the cryptocurrencies with negative Gain against the USD.

Cryptocurrency  Gain (G) Volatility (RMS)
Bitcoin 1.0045 0.0796
Ethereum 1.0033 0.0863
Ethereum Classic 1.0031 0.076
BCash 1.0029 0.1535
Eos 1.0024 0.1355
Dash 1.0013 0.0894
Monero 1.0007 0.0781
Stellar Lumens 1.0005 0.1207
Ripple 1.0004 0.1115
Iota 0.9984 0.127
Qtum 0.9979 0.1224
Litecoin 0.9976 0.095
Bitcoin Gold 0.9966 0.0983
Next 0.9954 0.11
Zetacash 0.9902 0.1104

It’s pretty obvious that i’ll not consider any crypto with negative Gain and Bitcoin is clearly the winner with the best Gain and low volatility compared to the rest. I exclude also all the crypto with positive Gain but with high volatility because the main objective is to allocate a portfolio with the lowest possible volatility.

The remaining crypto are:

  1. Bitcoin
  2. Ethereum
  3. Ethereum Classic
  4. Dash
  5. Monero

Ideally it should be allocated the same amount of money on each asset but to compute the fraction of your capital to put on each asset i use the same formula seen in Part I & II.

F = 2P - 1

Where F is the optimal fraction of your capital to wage in a single trade and P the persistence or Shannon Probability, concepts already explained in Part I & II.

Cryptocurrency  Persistence (P) Fraction of your capital to wage (F)
Bitcoin 0.55 10%
Ethereum 0.5441 9%
Ethereum Classic 0.5317 6%
Dash 0.535 7%
Monero 0.5286 6%

Thanks to the formula F=2P-1 I know how much to wage on each crypto for a total of around 40% of your capital to invest in crypto. The remaining 60% could be invested in traditional stuff of your choice (equities, bonds, real estate). But let see in detail a simple portfolio management strategy.

Simple Portfolio Management Strategy

  1. Maintain about ten, or more, equities in the portfolio.
  2. Maintain about equal asset allocation between the ten equities.
  3. Consider the investment horizon from one to four calendar years.
  4. Be skeptical of investing in assets with less than a two and a half year history with a minimum of four and a half years.

Four simple policies listed in order of importance, and the second policy is the one that makes the money or the “engine” of the strategy. A short investment horizon is mandatory because “risk management” is an important part of financial engineerin g and given enough time, no matter how small the risk, it will bite.

At the moment there aren’t ten cryptocurrencies that satisfy my needs in terms of Gain (G) and Volatility (RMS) so I have to find a compromise, using only five crypto and, personally, i prefer to don’t maintain an equally asset allocation among all cryptos because there is a huge difference in terms of size between Bitcoin and the others. Another issue is that many altcoins have less then 2 years of history because this new sector is relatively new so it is difficult to respect rule number 4.

Another important concept is how frequent to balance the portfolio. Doing it every day is really not necessary for the casual long term investor. An interesting choice is to rebalance asset allocation if there is an asset that exceed all the others by 5-10%. Basically when one asset increased in value more than the others, money should be removed from the investment, and re-invested in all the others thus defending the gains through investment diversification.

Aggressive Portfolio

Aggressive Asset Allocation with ~40% in crypto (click to enlarge)

The suggested asset allocation is intended as very aggressive having almost 40% allocated in cryptocurrencies, I would advise not to follow this if you are over 65 or if you have a family with kids. In this case I would suggest a maximum of 10% invested in cryptocurrencies (e.g. 6% Bitcoin, 4% Ethereum or 6% Bitcoin, 2% Dash, 2% Monero).

In the case of a very conservative asset allocation, for who has a very low risk tolerance, I would not go beyond 5% allocated in cryptocurrencies.

Personally i’ve a very high aggressive asset allocation but I’ve all the time and experience to follow carefully my Portfolio and to act accordingly to new information on a daily basis.

In the future i might publish other updates about the subject with updated quantitative data on altcoins/bitcoin.

 

 

Long Term Update: approaching resistance area

download
Weekly Chart XBTUSD composite index of 7 exchanges

I include in this long-term update the template I mainly use with the tradingview platform that includes my KAMA average with deviation lines tuned for XBTUSD currency pair.
You can see that this currency cross is entering an interesting resistance zone ranging from 3200 to 3900 dollars; I included in the chart also the 2 months VWAP average and the 1 year too.
The average VWAP at 2 months is slightly above the 5 periods KAMA average while the 1-year VWAP is slowly rising and has come close to the negative deviation lines, around 1260 dollars.

It will be interesting to see the behavior of the next few weeks to see if this rise is just a spike or a solid trend, in the latter case it could mean that this year we could also see prices over 4000$, to understand this we will have to wait at least four weeks or this month.

Price range for this week is 2950$-3450$ with ALMA average firmly up and the RSI oscillator not yet overbought.

Long Term Update: Weekly Price Channel

weekly_chart_xbtusd
Weekly Chart – Price Channel

It seems that a correction has started on the weekly chart although the ALMA average is still bullish and not yet 100% confirming the move; sometimes a return to the mean or average is healthy for an uptrend, here the level is around 825$.

First deviation line is 650$ and the second one 530$. I fail to see an event strong enough to increase the volatility level so much to push this pair down to 530$, i remain confident that it’s not going so low and that the 650-825 usd price zone is a good support for long term buyers.

It is needed a close of this weekly bar above 1030$ to avert the risk of a correction of some weeks. The weekly RSI is above its mid-line or 50; in a strong uptrend the RSI usually stays above it as XBTUSD is doing since october 2015.

Weekly Top Estimate

weekly
In the previous update of 18 November I wrote that I would have expected a weekly Top in the price area between 770 and 910 US dollars. This week the cross xbtusd did a strong acceleration with an up movement of more than $ 80; these large movements concentrated in a single week can move the price regression channel that i use with MetaTrader 4, especially if they happen in a single price bar. The indicator adapts to new information that comes in projecting new supports and resistances levels with the effort to obtain a better fit of what is happening.

The new resistance zone ranges from $820 to $970 but you have to consider that if this week bitcoin price will continue to rise with this strength even this new resistance area will change again.

For those who are anxious to take profit or go short I strongly suggest to wait and see where this currency pair will form the next congestion zone on the daily chart.

For my italian followers here’s the italian version at bitchanger.com

Weekly Top Estimate

Weekly Top Forecast
Weekly Top Forecast

XBTUSD cross has finally break through the first resistance above the mid-line of the price channel now at $640, same price level of the 2 month VWAP. In the attached chart I highlighted the price zone where I expect the next top will fall.

I believe that the next top will fall in this price zone, precisely between 770 and 910 US dollars; because of the long-term trend still up i think that bitcoin could make a maximum higher than the previous one of June, it is not excluded a Top around $ 900 as shown in the weekly chart.

What if i’m Wrong

It exists the possibility that i’m wrong if the dominant timeframe isn’t the weekly.
So what? Well we can switch to another timeframe for example the monthly chart. Here the price channel is much wider then the weekly chart, midpoint is at around $500 usd and the two positive deviation lines are at 870 and 1500 usd. Again we have a resistance similar to the weekly chart, around 870-900.

In order to prove that my weekly scenaro is wrong XBTUSD have to break above 900 usd with strong volume, as you know a High-Volume Breakout signal a move higher possibly to $1000 and beyond.

Long Term Update: Weekly Chart

grafico-settimanale-xbtusd
Weekly Chart XBTUSD

In recent weeks the XBTUSD cross has finally accelerated to the upside after an accumulation period lasted two months, now it has reached the first resistance of the bullish price channel based on the weekly chart.

This area of resistance starts at $ 750 and ends at $890. I believe that the next top will fall in this price range, precisely between 750 and 890 US dollars. Because of the long-term trend still up i think that bitcoin could make a maximum higher than the previous one of June, it is not excluded a Top around $ 900 as shown in the weekly chart.

For those unwilling to risk it is not wrong to take profit at these price levels and eventually reopen the position once the $750 resistance level is broken.

Italian version here at Bitchanger.

Long Term Update: Weekly View

eng
XBTUSD Weekly chart with price regression channel

This is a weekly chart since the bottom of March, 2015; the underlying weekly tendency is still up since then.
Inside this long term up channel there are secondary tendencies or cycles clearly visibile and highlighted by the alma moving average.

Last up cycle ended on the top just outside the high volatility zone in June 2016. After 3 months we are still in a secondary  down cycle inside a big up cycle. As i’ve told you in previous updates the maximum extension of this down cycle is at $420 as indicated in the above chart, i doubt we will see weakness below this important level.

At the moment the price is exactly at the middle point of the price regression channel and it’s very hard to say which direction it’ll take, in any case if there will be a new crash down to $420 i’ll further increase my long term position; at the same time if XBTUSD start to stay consistently below $420 i’ve to conclude that the long term up cycle is over and a bear market is ahead.

As i’ve said many times in the past years i don’t believe in a prolonged bear market because bitcoin and its network are healthy and just at the beginning of their life. Key is patience.

Offtopic: Cacoethes scribendi

“Cacoethes scribendi” or translated from Latin to english “a burning desire to write”, writing always of bitcoin sometimes is boring, today i show you the template i use with metatrader 4 applied to other assets like stocks, indexes and altcoin.

I already explained that an idea that i like is to do a price regression of our asset using a filter that eliminates all cycles below 30-40 periods with the intent to extract the underlying long term trend, then you can try to earn some money trading the secondary cycles that move the price up and down inside the price channel.

SP500/N100 weekly chart

sp500

Mid channel line color is white thus this market is neutral the ideal situation to trade the price levels, at the moment there could be a short opportunity, stoploss above the dotted positive deviation line.

n100

Similar situation for the nasdaq 100 index.

GBPUSD

gbpusd

The big drop of the Brexit is clearly visible, the pound should stay above 1.29, it’s the moment to buy with a stoploss below 1.28

Nikkei 225

nikkei225

Nikkei is short for Japan’s Nikkei 225 Stock Average, it is a price-weighted index comprised of Japan’s top 225 blue-chip companies traded on the Tokyo Stock Exchange. The Nikkei is equivalent to the Dow Jones Industrial Average Index in the United States.
In this mothky chart is visibile the big rise fueled by the quantitative easing of the Japan Central Bank and the subsequent drop after flirting with the resistance at 21000.
At the moment it is holding above the first negative deviation line, i don’t see any trading opportunity.

Tesla

tesla.png

On the weekly chart the tendency is neutral, midline color is white, ideal to trade secondary cycles like the one that pushed down Tesla below 150 usd and below our support, a very good trading opportunity, it is possible also to trade the dotted levels but they are less safe.

Ferrari

ferrari

Daily chart of ferrari (RACE ticker), after an interesting double bottom on the support this stock trended higher above the resistance after the earnings.
I think we are seeing a buying climax and in this situations is smart to sell the good news, i see a short trade opportunity here but it’s wise to wait some weak signals from this stock before going on.

Nintendo and the Pokemon Go Bubble

nintendo

No comment here, the bubble is evident but this stock is still hovering above midline and the long term trend is bullish. Again a nice double bottom at the support.

Apple

aapl

Last five years of Apple in this monthly chart, here the support levels worked almost perfectly. Apple is losing some steam as the midline color is white, neutral long term tendency despite you can see a sequence of higher highs and lows. The stock reacted from the dotted line at around 90 usd but i’m not sure is going up yet, the trading opportunity here is a test at 75-80 usd this year or the next one.

ETCUSD – Hourly chart

etcusd

Hourly chart of ethereum classic, again bubbles are clearly visible. Some congestion outside the upper solid deviation line it’s the warning signal, be prepared to open a short. Now volatility is a bit lower and this altcoin is moving inside the dotted deviation lines. I see a buying opportunity once 1.85 usd is tested.

Conclusions

This price channel indicator is an improvement of the classic bollinger bands indicator, what i don’t like of the bollinger bands is the wrong way to compute the upper and lower bands that might lead to very misleading values sometimes as i explained at the end of this old article. To keep things simple i omitted to include some timing indicators, for example adding the Walter Bressert DSS oscillator with ethereum classic we have:

etcusd+dss

Clean cycles togheter with a correct approach to spot support/resistance levels and you have a decent guide to follow. This oscillator is configured using 9 periods and 5 periods for a second pass smoothing.

 

 

Long Term Update

This is a template i use with metatrader 4 where you can see a price regression channel. Yellow line is the same average i use on sierrachart, ALMA moving average.

weekly
Weekly Chart since October 2013

The dotted deviation lines are calculated using the volatility derived from the average true range indicator. The solid deviation lines are calculated with the same approach but using two times the value of the average true range. Most of the time XBTUSD stays inside the dotted deviation lines but during period of high volatility it moves towards the solid deviation lines as happened in the last Top of June at $780.

With the bitfinex flash crash XBTUSD tested the first lower deviation line at $475 although on some exchanges the bottom touched $460. I don’t think is over yet, there might be a secondary reaction that can last all this month and maybe part of September with a test of the lower deviation line, this price level is near $400 as indicated in the chart.

The color of the mid-channel line represents the strength of the trend, red if bearish, white for neutral and green if bullish, at the moment the main trend is bullish and it’ll not change if XBTUSD doesn’t move below $400 for a prolonged period of time. I’m not going to liquidate my position as soon XBTUSD stays inside this long term bullish price channel.

As usual this article is available also at steemit.

Long Term update: Static Resistance

Monthly Chart

monthly

This is a simple monthly chart since Jan.2012, important facts are:

  • Accumulation zone #2 is above previous one, #1 in the chart
  • The static resistance at $680 is also the 50% of the price swing from the all time high down to the 2015 bottom at ~$150

As i explained in past updates the midpoint or 50% it is one of the strongest and most important resistance/support level. The main trend is obviously up (at least so far) because the low around point 2 in the chart is above point 1 thus is legit to expect a new all time high if this market can break above the $680 static resistance.

Furthermore the fact that the two accumulation zones highlighted in the chart never overlap tell us that the underline long term trend is very strong and because of this i expect a new all time high in case of a strong breakout above $680.

Forecasting resistances

btcusd-mn1-simplefx-ltd

This is a template i use for long term analysis with metatrader 4 platform, first i compute a price regression with 12 or 24 bars/months with a monthly chart then i compute supports and resistances. Dotted lines represents supports/resistances using the recent volatility of XBTUSD, non-dotted lines are levels computed using twice the value of recent bitcoin volatility.

We are exactly at the resistance and this is very interesting because in 1-2 months we will see if bitcoin long term trend is still up or not.

I have taken in account the log-normal distribution of price otherwise i’d have had very bad results in computing the levels, usually it is not required but when prices movements are so high you have to. What does it mean? It’s simple, before doing any calculation first compute the natural log of the price, do your stuff and last reexponentiate the data to have back the price chart with a linear scale.
This is why i do not recommend to use standard bollinger bands with bitcoin on a long term chart, you would have bad results, sometimes with the lower bollinger band going negative! clearly unrealistic.