Bitcoin has been one of the favorite objects of trading speculation in the recent years: it’s vaulted over six million percent with compound annual return of more than 200% every year since 2009 (h/t Raoul Pal).

Even just in the last 12 months, it has gone up from under $10,000 to over $63,000. However, in the last few weeks Bitcoin’s ascent has flashed a few significant warning signs. First, the correction after the April peak made a new trough that was lower than the previous one:

The next rally proved weaker than the previous one, creating a lower new peak:

Yesterday (13 May 2021) Bitcoin broke through the “neckline” of the Head-and-Shoulder pattern that appears to be forming:

While yesterday’s decline was exacerbated by Elon Musk’s latest pronouncement on cryptocurrencies, that market reaction wasn’t the first sign of weakness for Bitcoin and investors should take these signs seriously: the currency is still trading at dizzying highs.

Is Bitcoin ripe for systematic trend following?

Bitcoin has now accumulated more than ten years of price data – to my mind the bare minimum required to even contemplate formulating systematic strategies. But Bitcoin presents another difficulty: its price history consists of a handful of hockey-stick rallies interrupted by long periods of decline and consolidation. On that ‘terrain,’ any trend following strategy that captures profits from those hockey-stick intervals will appear like a winner. This makes it difficult to separate the wheat from the chaff so it is too early to talk about high-conviction strategies for Bitcoin. Having said that, I believe that systematic trend following is still preferable and safer than discretionary trading.

I have now formulated a set of I-System trading strategies for Bitcoin and added ten of them to our USA PLUS! portfolio. Here are the signals that yesterday’s price action produced:

The above strategies span long-cycle, medium-cycle and short-cycle trends. Even though four of them now reversed to the short side, their cumulative exposure is still net long. at the moment strategies still hold a long position albeit a minimal one. Without doubt, further down closes will gradually tip the strategies over to the short side but only time will tell if the current fluctuations are tracing the beginnings of a major reversal – or a minor hickup for Bitcoin.

Coming soon: low-priced USA and USA PLUS! portfolios

TrendCompass reports are designed for professional users and as such may not be affordable for most individual investors. However, we are today facing a confluence of four significant risk events that require high quality decision support as they could prove very damaging to all investors:

  1. Bursting of the asset bubble
  2. Inflation
  3. Energy crisis
  4. Commodity super-cycle

While nobody can predict how these events will impact the markets, I do strongly believe that systematic trend following is the only valid answer to the problem of uncertainty. The new TrendCompass reports will cover the major US equities and treasuries as well as Gold, Silver and Bitcoin. They will become available for subscription as soon as we’ve defined their pricing. We’ll endeavor to err on the low side. In the meantime, below are the images of each report’s summary page (for 11 May 2021):

TrendCompass USA portfolio
TrendCompass USA PLUS! portfolio

The announcement will be coming soon, so stay tuned!!

Alex Krainer – @NakedHedgie has worked as a market analyst, researcher, trader and hedge fund manager for over 25 years. He is the creator of I-System Trend Following, publisher of TrendCompass reports and contributing editor at ZeroHedge based in Monaco. His views and opinions are not always for polite society but they are always expressed in sincere pursuit of true knowledge and clear understanding of stuff that matters.


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