Lars: “Knowing how to use cyclical analysis should be part of any serious trading approach and can increase the probability of successful strategies. Because if a rhythmic oscillation is fairly regular and lasts for a sufficiently long time, it cannot be the result of chance. And the more predictable it becomes. There is often a lack of simple, user-friendly applications to put this theory into practice.”
Cycle Analysis Explained
The following chart, courtesy of www.whentotrade.com , summarizes all relevant parameters related to a “perfect” sinewave cycle:
Cycle Analysis: The Calculation Logic Used
While there is no fix approach to the selection of market rhythms through time-based cycles, I tend to add more weight to lengthier periods as these are the ones that validate the long term dominant flows. Periods below 50 may add unnecessary noise to the main cycles at play. I then combine large length periods with the ones exhibiting the highest amplitude cycles. What I’m doing is picking 1-3 high amplitude cycles in order to create a composite cycle (in magenta line) and then investigate whether or not the standalone dominant cycle can fit this curve.
I then play around with the combination of high amplitude cycles until I get a composite curve that has peaks and troughs that match the price data. In the majority of times, over 80%, I end up finding a combination that matches the peaks & troughs pretty well. If a sufficient in-sample over the last year or so see the peaks and valleys match nicely for the past year, that’s the goldilocks scenario. If not, I play around with different combinations of the high amplitude readings to get the composite curve as close to the price peaks & valleys as I can.
BTC/USDT – Dubious Technicals Amid A Macro Bullish Cyclical Rhythm
There is no question that technicals in Bitcoin have been damaged quite badly in the near term. This is obvious through a multitude of elements. Firstly, The market reverted back down with violence during the month of May, compromising the structure of higher highs along the way. That’s a big negative. Next, the sell-off resulted in a complete loss of the bullish energy in this market, aka ‘momentum’. To make matters worse, the back-to-back weekly selling candles had behind a lot of volume, way above the typical average we are used to see. These are the obvious negatives for all to see in plain sight.
Now, on a positive note, the BTC/USDT chart found support by holding the line of defense near 30k. This is a location filled with heavy buy-side pressure as one can tell by the absorption it produced. The absorption is visible through the wick printed on the weekly candle that allowed to have a backstop for all the mass selling we had. One can refer back to how I’ve drawn this red line by capturing the period of consolidation we went through earlier in the year. Besides, this level coincides with the psychological vicinity of 30k, which for large players looking to cost average into BTC, it will always matter a big deal. The area is also converging with a 50% retracement from the previous all time high, which again, it has proven to historically represent inflection point. Last but certainly not least, the absorption through the lows occurred around a 100% measured movement target, which is suggestive of an exhaustion in price.
Let’s now incorporate cycle analysis into the mix. By decoding the most probable cycles based off time, it’s interesting to notice the huge converge through multiple long-term periods. The exhibit bellow illustrates an ideal cyclical environment for the bulls. There are 3 lengthy periods identified with high amplitude (230, 106, 60), high bartel (accuracy), and solid strength. They all predict a macro turning point from June that will last till the very end of the year. These 3 periods form what Lars Von Thienen coins the composite cycle overlay and it gives us great prediction power to analyze the big picture trend.
We can then look into the more granular cycles in Bitcoin. Here, we can identify 29 as the period most pristine to spot turning points in the market. There is currently an open window of upside potential up until the 2nd week of June, by which time, the short-term cycle will start to turn lower. What this means, from a short-term cycle standpoint, is that the market is likely to on-ramp further buying interest for the next 2 weeks in line with both the short and long term cycles. Beyond this window of time, while the macro will still look very promising, a renewed period of sell-side pressure may ensue.
You may be asking as a reader of this article, how can this possibly help my trading decisions? In timing your entries! It definitely serves me extremely well to calibrate my bias and when the best period to long Bitcoin tends to be. As the article describe, I start my thesis by modelling the scientifically-driven data provided by the Cycle Scanner, from there, I form an opinion based off both the short term and long term dominant cycles.
This shows the time-based rhythmic patterns of the market, which as a result, allows me to to project and better predict behavior into the future. The icing on the cake, of course, is to then combine this cyclicality in markets with technicals as the ultimate signal. In the case of Bitcoin, I am looking to buy dips with a high degree of conviction in the next 2 weeks as I know the cyclicality is in favor. Upon inspection of technical aligning in the lower timeframes, I look for my trades.
As a final note, I want to show you below the BTC/USDT daily chart. The point I want to make here is that I predict is going to be a tough climb. Just look at the sheer amount of work needed to be done to penetrate each and every of the hurdles we’ve created on the way down. Still the cycle studies suggest we should be able to find enough buyers’ power in the next 2 weeks to revisit the 40k. Should the opposite occur and we start to flirt with the 34-35k come the 2nd week of June, I will defiantly be looking to put on my defensive hat on, as technical and the near term dominants cycles will be painting a rather dire picture.
I hope you enjoyed this article!