Grayscale Bitcoin Trust: Cover Longs On Any Rally To New Highs

About: Grayscale Bitcoin Trust (BTC) (GBTC)
by: Equity Management Academy

The market pretty much completed the S1 target of $15.74, with the market making the high today of $15.80, which created a new setup.

If we get a close below $15.74 using the 15-minute bar, it would activate a short signal from the sell 1 level of $15.74.

If the market comes down below the average price of $13.87, it activates B1 and B2, the extreme levels below the mean.

I am writing this report about the Grayscale Bitcoin Trust (OTCQX:GBTC) because it is a regulated Bitcoin trust, as opposed to the unregulated Bitcoin market, which trades 24 hours a day.

"It can be difficult at times to identify some of the data points that meet the criteria necessary for the Variable Changing Price Momentum Indicator (VC PMI) to produce these high probability levels," explained Equity Management Academy CEO Patrick MontesDeOca.

Therefore, the artificial intelligence in the VC PMI can be used more accurately using GBTC based on the closing data for the weekly report.

As I write this report on July 8, 2019, at 2:44 pm, GBTC closed $15.73. If you look at the chart, it has completed the sell 1 (S1) target of $15.74. The Sell 2 (S2) level is at $16.82. The market pretty much completed the S1 target of $15.74, with the market making the high today of $15.80. This created a new setup.

"The artificial intelligence in the VC PMI tells you that the first time the market reaches a target, in this case 15.74, from a low position of 12.79, as you can see on the chart," MontesDeOca explained, "it has completed the extreme level above the mean of 13.97 target."

Where Do We Go From Here?

The VC PMI AI tells us that once the market completed that target, it creates a new setup. The previous setup goes neutral, and the artificial intelligence says if we get a close below $15.74 using the 15-minute bar, it would activate a short signal from the sell 1 level of $15.74.

The S1 and S2 levels are the extreme relative implied volatility above the average price of $13.97. S1 has a 90% probability that a reversion will occur. If you buy at this level, you only have a 10% chance of a profitable trade, as opposed to a 90% probability that if the short trigger is activated by closing below $15.74, then, as a swing trader, you can capture the downside with a target of $13.87 initially. The signal then goes neutral and tells you: wait and see what the price does. If it closes below, it activates the buy 1 (B1) level of $12.79 and the B2 level of $10.92, which are ideal levels to add to the long term or to initiate new longs.

The VC PMI provides a perfect Fibonacci structure that uses five levels. It identifies the average price in green on the chart with the extreme levels above that mean with 90% and 95% probabilities within this structure.

If the market comes down below the average price of $13.87, it activates B1 and B2, the extreme levels below the mean.

The VC PMI gives you specific levels to trade from with specific probability factors. It does not provide directional movement, unless the market reaches these levels above or below the mean, in which case the odds are high that the market will revert. I explain this methodology in great detail in my recent book, Mean Reversion Trading.

The VC PMI Automated Algorithm

We use the proprietary Variable Changing Price Momentum Indicator (VC PMI) to analyze the precious metals markets and several indices. The primary driver of the VC PMI is the principle of reversion to the mean ("Mean Reversion Models of Financial Markets," "The Power of Mean Reversion in Factor - Based Investing"), which is combined with a range of analytical tools, including fundamental logic, wave counts, Fibonacci ratios, Gann principles, supply and demand levels, pivot points, moving averages and momentum indicators. The science of Vedic mathematics is used to combine these elements into a comprehensive, accurate and highly predictive trading system.

Mean reversion trading seeks to capitalize on extreme changes in the price of a particular security or commodity, based on the assumption that it will revert to its previous state. This theory can be applied to both buying and selling, as it allows a trader to profit on unexpected upswings and buy low when an abnormal low occurs. By identifying the average price (the mean) or price equilibrium based on yesterday's supply and demand factors, we can extrapolate the extreme above this average price and the extreme below it. When prices trade at these extreme levels, it's between 90% (sell 1 or buy 1 level) and 95% (sell 2 or buy 2 level) probable that prices will revert to the mean by the end of the trading session. I use this system to analyze the gold and silver markets.

Strengths And Weaknesses

The main strength of the VC PMI is the ability to identify a specific structure which price level traders can execute with a high degree of accuracy. The program is flexible enough to adjust to market volatility and alerts you when such changes take place, so one can adjust strategies accordingly. Such changes include when the market breaks out of a consolidation phase or a trend accelerates. Such volatility usually happens when the market has produced a signal at the S2 or B2 level, and the market closes above or below these extreme levels.

The day trading program then confirms that a higher fractal in price has been identified, and the market will move significantly higher, although the same principle applies if the market falls significantly. The price closing above the S2 level indicates that the buying demand is greater than the supply. This means that the market has found support for the next price fractal. Conversely, the price closing below the B2 level indicates that the selling pressure has met demand greater than supply at the extreme below the mean, and prices should revert back to the mean.

The basic concept of the VC PMI is that the program trades the extremes of supply and demand based on the average price daily, weekly, and monthly.

The strongest relationship we find in the algorithm is when the daily price is harmonically in alignment with the weekly and monthly indicators. We call this "harmonic timing." Such an indication produces the highest probability (90%) that the price will revert from these levels to its daily, weekly, or monthly average.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in GBTC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.