Bitcoin: Understanding CME Gaps - A Full Perspective and Guide

15 août 2020

X Force Global Analysis:

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In this analysis, we take a look at Bitcoin's rather peculiar tendency to fill CME gaps. What are CME gaps, and why do they occur?
First of all, Bitcoin does not trade 24/7 on one specific market, which is the CME market. This means that at a certain point in the day, the market closes and trading stops altogether - just like in traditional stock markets.

When looking at these CME gaps, an investor might conclude that they will be filled quickly within the next few days. And based on this reason alone, many traders will take a long or short position based on the gaps produced. If a gap is produced while price is moving up rapidly, a trader might conclude on taking a short position with the notion that the gap will eventually fill. While this is fundamentally true and a good trade setup because gaps have traditionally filled 100% of the time via Bitcoin's history, it can be still dangerous if the trader does not know how to execute the trade properly, especially if the trader is in a leveraged position. A basic understanding of major trend shifts, then taking CME gaps into the trader's strategy is a recipe for success.

From a technical stand point, when a gap appears within the charts, it removes the immediate support or resistance and creates the tendency for most traders to notice this, which may be the reason why the new tradition of 'gap filling' has been a part of Bitcoin's price action since the introduction of the CME market. Either way, if price action moves further away from the gap, the higher probability of a stronger drop/pump will be, which may or may be bad for both bulls and bears.

For our viewers sake, we have done the calculations to show 2019's high to current price on how long it has taken to fill. The average has been 63 days.

Will Bitcoin's CME gap be filled before we reach new highs? Or will we see the gap fill, then run towards new highs? We leave that up to you.

How to trade CME Gaps?

Trading CME Gaps can be very tricky, especially if you take a position too early. As we have stated earlier, all of Bitcoin's CME gaps have been filled 100% of the time. This current gap we are seeing may be no different. It's a matter of WHEN, not IF. With that being said, the best possible way to trade this is to understand basic support and resistances. We are currently facing strong resistance at 12K, and if broken, we face the possibility of a longer wait time for the gap to be filled. This can be a good or bad thing:

Good: BTC will be breaking major legacy resistances, and show sign of growth in the immediate future.

Bad: BTC will be further deviated away from the current CME gap below major psychological resistance at 10K, and may further put bulls in disparity once the gap does fill.

Bitcoin has retested major trend support technically twice, and it may desirable to retest it a third time before we can show true strength in BTC's trend. This can mean a longer accumulation phase and an possible impulse waves that will make Bitcoin's drop more severe based on our CME gap theory.

Trade Safe.

X Force.

17 août 2020

Note

Moving back to the daily chart, we can spot a clear bearish divergence forming.

A divergence appears when a technical indicator begins to establish a trend that disagrees with the actual price movement. The formation of a divergence indicates potentiality of a reversal, or continuation in the case of hidden divergences.

A bearish divergence (as demonstrated above) normally occurs when prices form higher highs, while the indicator (such as the RSI in this case) forms lower highs. Essentially, this could be interpreted as bulls attempting to break through resistance levels by creating higher highs, but failing to do so, as they lack the strength and momentum. We can also see that the MACD moving averages are also trending downwards, having formed a death cross.

However, there are some limitations to be recognized:
- A divergence isn't to be relied on exclusively, as it doesn't provide timely trade signals.
- A divergence can last a long time without a price reversal occurring.
- Also, on the shorter time frames, such as the hourly or the 4H chart for Bitcoin, we have seen divergences get negated numerous times, or play out only to a small degree
- Because a divergence will not be present for all price reversals, some other form of risk control or analysis needs to be used in conjunction with divergence.