Bitcoin, the most traded cryptocurrency and a stock company, what have in common? In this educational post, we’ll apply two concepts, divergence and correlation, to learn what have in common.
The key concepts
The divergence occurs when the price follows a direction and an indicator moves in the contrarian direction. Divergence can be bullish or bearish. Bearish divergence is when the price moves in a bullish trend and the indicator decrease. A bullish divergence occurs when the price moves in a bearish direction and the indicator showing bullish signals. Consider that divergence is only an exhaustion signal, not a trend reversal pattern.
The correlation is the relationship level between two or more assets. Correlation can be positive if the assets move in the same direction; or negative if prices move in the opposite direction. For example, The US Dollar Index (DXY) and the EURUSD pair, have a negative correlation. It means, when DXY increases, EURUSD drop, and vice-versa.
Consider that we can find divergences between two assets.
Relationship between RIOT Blockchain Inc., and Bitcoin
The following chart shows the correlation between RIOT and Bitcoin. RIOT is a Blockchain technology company, and Bitcoin is a cryptocurrency. RIOT and Bitcoin characterise due to having a positive relationship, but in the last weeks, the prices show a divergence.
Our forecast for Bitcoin
Using Correlation Analysis, we observe that RIOT is a Bitcoin’s leading indicator. In consequence, our vision is to expect a potential decline as a zigzag sequence. This drop could follow the path $9,100-$7,012-$5,428 ( 200-100-23.6.)
Remember that the price is not compelled to move as our forecast proposes. The charts released corresponds to the Elliott Wave Theory application.