As reported by Forbes, the Chinese Lunar holiday began and as millions of Chinese travel, volume in Bitcoin and other traded cryptocurrencies is expected to decrease. Forbes also reported that Bitcoin’s trading volume has decreased to its lowest level since April 2019. Bitcoin’s monthly volume continues to decrease. Bitcoin’s volume has dropped 90% from the June 2019 highs. The adage, ‘volume precedes price’ is certainly a phenomenon that is present in many markets, does it apply to Bitcoin as well? Let’s see.
Volume precedes price.The arrows on the chart above show some of the directions of price and volume. What you will notice and hopefully observe is the frequency of volume dictating the direction of future price. This is just another example of why Bitcoin is often called the perfect technical market. But volume is not the only indicator that Bitcoin seems to follow with such powerful consistency.
Nearly the entirety of technical analysis is based on lagging data. That is because the tools used to calculate data requires past data. However, some concepts of technical analysis can turn lagging indicators into leading indicators. One of those concepts is divergence. In technical analysis, the word divergence is most often related to the difference between price action and an oscillator, most commonly the RSI (Relative Strength Index).
Regular Bullish DivergenceThe image above is an example of a divergence known as bullish divergence or regular bullish divergence. A bullish divergence occurs when price action creates new lower lows, but the RSI creates new higher lows. Bullish divergence is a warning sign that a bear trend could end very soon. We can see that prices did eventually move higher. Does Bitcoin have any divergence(s) present on its current chart?
Hidden Bullish DivergenceThe chart above shows the answer to the question in the last paragraph: yes, there is a divergence present. The divergence that present is called hidden bullish divergence. Where regular bullish divergence shows price action creating lower low and the RSI creating higher lows, hidden bullish divergence swaps price and the oscillator. Hidden bullish divergence occurs when price action makes higher lows, and the oscillator makes lower lows. You might be looking at the chart above and notice that both price action and the RSI show higher lows – so where is the divergence? Between the RSI and Composite Index.
The Composite Index is an indicator created by the great Connie Brown. In a nutshell, the Composite Index is the RSI with a momentum calculation. In other words, the Composite Index can detect divergences that the RSI is unable to. I like to use a suggestion that Connie Brown made in her groundbreaking work, Technical Analysis for the Trading Professional. In her book, Connie Brown suggested looking for divergences not between the Composite Index and price action, but between the RSI and the Composite Index. This is done by looking at the RSI like we would the price chart. The hidden bullish divergence is present because the RSI has made higher lows, but the Composite Index has created lower lows. But hidden bullish divergences are only appropriate to trade if an uptrend existed before the hidden divergence. Bitcoin is currently in an uptrend, so the hidden bullish divergence is valid to take a buy signal on.