Bitcoin: Heikin-Ashi Candles

Today's discussion focuses on Bitcoin and monthly Heikin-Ashi candles. This is a topic that hasn't been discussed in about four years, but it's particularly useful in midterm years to help stay on the right side of the trend. There's been recent discussion about Bitcoin's current rally being "the most hated rally ever," with many claiming it's different from previous patterns. However, by looking at charts through Heikin-Ashi candles, we can reduce noise and better understand the larger trend. Before diving into Heikin-Ashi candles, it's important to note that current market behavior isn't that different from prior bear markets in midterm years, which often feature counter-trend rallies. These rallies don't necessarily signal the end of a bear market or prevent further price increases. The challenge is distinguishing a counter-trend rally from the start of a new bull market. While Heikin-Ashi candles provide confirmation, there's a lag, meaning the low would already be in by the time confirmation appears. Heikin-Ashi candles differ significantly from normal candlestick patterns. In normal patterns, the high, low, open, and close for the month are simply those actual values. With Heikin-Ashi, these values are calculated differently. The Heikin-Ashi close is not just the month's closing price. Instead, it's calculated as one-fourth of the sum of the open, close, high, and low of the traditional candle. This averaging is why Heikin-Ashi candlesticks tend to remain red throughout most of a bear market, even during counter-trend rallies. The Heikin-Ashi open is half the sum of the previous Heikin-Ashi open and the previous Heikin-Ashi close. This calculation makes current candlesticks dependent on prior ones, resulting in a smoother trend that helps filter out market noise. The Heikin-Ashi high is the maximum of three values: the actual high of the period, the Heikin-Ashi open, or the Heikin-Ashi close. Similarly, the Heikin-Ashi low is the minimum of the actual low, the Heikin-Ashi open, or the Heikin-Ashi close. Understanding these formulas provides intuition for interpreting the charts. Looking back at the last two midterm year bear markets (2018 and 2022), Heikin-Ashi candles remained red for the entire duration, despite counter-trend rallies. For example, if one had waited for Heikin-Ashi confirmation and bought Bitcoin in January 2023, they might have missed the absolute bottom by a few thousand dollars, but they would have avoided FOMOing into the counter-trend rally that, when viewed through Heikin-Ashi, doesn't appear as a strong rally. Switching back to normal candles reveals these counter-trend rallies clearly, but Heikin-Ashi effectively "disappears" them, suggesting that the current rally is not as unique as some claim. The idea that this is "the most hated rally ever" is challenged by the fact that similar counter-trend rallies in previous bear markets (2018, 2022) were not labeled as such. In bear markets, the downward wicks in Heikin-Ashi candles can trend up during counter-trend rallies, but the candles themselves don't typically turn or close green. In April 2018, Bitcoin rallied nearly 34%, and this April it rallied 13.5%, yet in both cases, the price eventually went down. Seasonality also shows similarities between 2022 and 2018, with early February lows, higher lows in late March/early April, a rally into late April/early May, and then a market reversal. If the current rally fails in the next couple of weeks, monthly Heikin-Ashi candles will likely remain red. For them to turn green, the rally would need to persist, potentially into June, as seen in 2014. However, April 2014 was red, unlike the green April this year. The 2014 rally ultimately led to a lower high. In 2022 and 2018, Heikin-Ashi candles stayed red throughout the bear market, only flipping green in April 2019. While waiting for this confirmation meant missing the absolute bottom, buying Bitcoin at $4K or $5K in April 2019 was still a better strategy than FOMOing into earlier counter-trend rallies. Heikin-Ashi candles have benefits but are not a perfect investment strategy. Comparing the current market to 2014 and 2019, there are similarities to 2019 in terms of drawdown type and rally duration before the pandemic. However, it's unlikely this analogy will hold. If there's a durable breakout from the downtrend for a few months, it might be a "fake out" like in 2014 and 2020, not leading to all-time highs. The belief that Bitcoin will reach all-time highs in 2026 due to the stock market's performance is challenged by historical data: the stock market reached all-time highs in 2018 and 2014, but this didn't prevent Bitcoin from continuing its bear market. Heikin-Ashi candles with long wicks to the downside and no wicks to the upside indicate a strong downward momentum. When this changes and shows hesitation, it often occurs at some point in the bear market, as seen in March-April 2022, April-May 2018, and 2014. In all these cases, a convincing bear market was followed by a counter-trend rally, and then a further drop. It's easy to claim "this time is different" and call the current rally "the most hated ever," but historical data suggests otherwise. Metrics like stablecoin dominance show similar patterns to previous cycles. There's a potential for Bitcoin to follow a pattern similar to 2018: a rally, a drop before an FOMC meeting, a rally after FOMC to sweep the high, and then a decline through May, potentially finding a low in June. This June low could align with a potential rate hike by the Bank of Japan, which historically has sometimes corresponded with a drop in the crypto market. While Bitcoin might have enough energy to reach the 200-day moving average in the next week or two, a more likely scenario is a local top soon, followed by a drop into June. Seasonality, while not always accurate (around 70% of the time), historically points to a Bitcoin bottom in June, with 2014 being an exception where the next low after April occurred in October. The current market sentiment, where those who were bullish at $120K are now "dunking on the bears," is noted. While long-term Bitcoin success is desired, midterm years tend to be bearish. If there isn't renewed weakness in May or June, a reassessment of the market will be necessary. The idea of this being "the most hated rally ever" is considered absurd, as previous similar rallies in 2018 and 2022 were not given this label. The "most hated rally ever" in the last cycle could arguably be the one where Bitcoin marginally surpassed its prior high, but altcoins bled out, failing to catch a bid. This left many altcoin holders feeling frustrated, as Bitcoin's rise didn't pull the rest of the market up significantly. Emotions are running high due to the rally off the lows, even though the rally itself hasn't been massive. The shallow pullbacks and four consecutive green weekly candles since April contribute to this sentiment. However, a similar pattern of upward trending throughout April, followed by a rollover in May, was observed in 2018, and that rally was not deemed "the most hated ever."