Lessons from BTC tops.
And how they may help us later.
We started this by making a hindsight based case that using models of the market action from 1910 - 1940 would have been useful through the last 20 years and the grim implications of what they’d mean if we were to continue that theme.
We then went on to look at ways we could test the hindsight generated theory by making real trade plans of what future swings would look like and what they’d suggest to us to expect next.
Hopefully we’ve shown through these posts that there’s some utility to the modelling of current action based on previous action. It’s not been perfect, but it’s been quite far above what one would expect were it all down to chance. And this is surprising to see in the real world, but it’s not really surprising on the charts.
BTC 2021 Crash and DJI 1929
Early to mid 2021 I floated a theory that BTC was setting up for a massive crash and this could be forecast by using a model of the DJI crash in 1929. This sounds silly. BTC was making all time highs routinely at this point and the idea you can forecast a sudden turn in that based on a model of the DJI in 1929 makes no real world sense.
To test the BTC thesis and allow for objective review of it, we did the same as we’ve done here. Made the historical case and then posted the real time trade plans. We started getting signals around 50K. Took some stops outs and shorted higher and ended up with an optimal entry into the BTC high.
To get a big high after trying a few times could just be lucky. We’d said from early on BTC over 70K would prove the thesis wrong, but the nature tendency of a reader may be to expect we’d just have kept shorting and therefore it was luck we got into the trade.
But we also gave a target low of 31K, which was the 161 fib of the topping swing (A target swing derived from the DJI 1929 model, as had the topping pattern).
The model’s success there was very impressive.
And then it totally broke down! We caught really good trades from the high to low. Caught good bullish trades in the 30 - 40K bounce, but once that bounce was made the DJI model called for positioning short into rallies for a big second leg. We lost in these three main areas.
And incorrectly called for a short throughout. But quite a lot of the short entries were profitable and while we were overall incorrect strategies ran at least breakeven through this. Everyone can tell you yesterday’s best trade, in real time this looked very convincing for following classic models.
Our main losing area was into the 76 fib. Which was initially profitable and but shorting into the next rally was one of the notable failure of the strategy in 2021.
This was the moment of peak wrongness! At this point I’d been very confident the models would succeed and what followed really threw me.
I was really surprised and in the weeks that followed markets made really tricky up and down moves and I understand that were I to make a similar mistake if the SPX (Hypothetically) capitulated 50% and went into this retrace pattern, with it being a much bigger asset/longer-timeframe, this could be a colossal mistake.
The real BTC top was not that hard, from a TA perspective. As soon as I dropped the idea that the DJI model was working essentially 1:1 (Because it literally had for a 50% drop!) and started to look at what had happened on the chart I knew I could not define my final short levels and places bulls have probably won and full bear exit.
I remained bearish (This would have been my peak in unpopularity during 2021 I suspect) and made an “Unpopular forecast” BTC would drop 70%, without going over 71,500.
Ironically the unpopular forecast got 7 upvotes on Reddit. Which was more popular that the forecast of it starting. This had s score of 0 for a long time. Now it’s back to 1.
It would start on Monday. BTC would in fact rocket through Sunday and make a a false breakout before turning into a very obvious and sustained down move. And in the end, this was simply a butterfly pattern that ran the full range to the 220 fib. This was how we were able to define the failure point of the strategy and, which it was counter-intuitive, be bearish over 65K.
And the butterfly has worked perfectly. Clearly the market has entered into a downtrend when it has broken as the 127. In hindsight, shorting 161 and adding into 220 (Which would be my butterfly rules), clearly produces optimal trades here. This was basic TA stuff.
Here’s this extrapolated onto the SPX to make an assumed model of what we’d have if the first part of the move was similar to the DJI model but then it went into a tricky series of bear traps and then a very brutal bull trap running ever so slightly over the high before settling into a real bear market.
In the hypothetical scenario where SPX rapidly drops 50% (For whatever reasons, I just draw the lines) this modified bull trap featuring a parabolic spike out of the high is a risk bears need to be well aware of. It’s also a much more brutal move for the bulls. Look how much longer the second BTC drop took to develop than the first.
The second drop in SPX would be expected to be a year long bear market. Overall persistent selling but it having enough up moves to trap in new bulls into the rallies. Ranges and shallow bull rallies later in the move would be 6 months each. Would take at least a couple years to get to where BTC is now.
And this is not the implied low for BTC in a bust model. From here we usually enter into a section of the move where drops are about 50% in total and then it rallies and repeats that. This takes a long time to grind lower. By the time the bear market is over this section looks like a long flat tail, taking much longer than the boom period.
This is the same type of the move the DJI model of 1929 would say is coming in SPX were it to complete.
The modified model with a spike-out would be a much more painful move.
This all remains purely hypothetical on SPX at the moment, but were we to see the trigger swing for this decision (50% drop) we’ll focus on making trade plans that have considerations for the respective bullish and bearish risks/opportunities in each part of the move.
I feel there was a lot to be learned from the BTC move regarding the capabilities and limitations of this type of modelling. It succeeded and failed spectacularly. Both had a lot of interesting lessons to carry forward. It should be noted, the general crypto bear market largely followed DJI models. No new highs. BTC, had one more punch.
No man was wise by chance, thank you for all you do with sharing your knowledge and research with us. It’s one of the few things I have to look forward to in this crazy world. Cheers!