Bitcoin has been on a tear since the beginning of October (also the beginning of Q3) as traders used the month of September (also the end of Q2) to take profits. Bitcoin formed an AB=CD pullback before reversing and moving to its highest level since May 10th this week! The cryptocurrency is formed a shooting star on the daily timeframe on October 14th, indicating it may be ready for a pullback. The RSI is diverging from price as well. Horizontal resistance above is at the May 10th highs of 59,603, the 161.8% Fibonacci extension from the September 7th highs to the September 21st lows at 61,261.92 and finally the all-time highs from April at 64,895.22. If Bitcoin does correct, there is support below at the September 7th highs near 53,115.06, then a quick spike low from October 10th, down at 51,000. In addition, the 50-Day Moving Average is the next support level at 48,238.22.
However, if traders don’t have access to trade Bitcoin, they can still use the cryptocurrency to help them trade foreign exchange. Correlation is a word that is used to describe a relationship between two assets. The correlation coefficient describes how one asset moves in relation to the other. A correlation coefficient of +1.00 means that there is a perfect positive correlation and the 2 assets always move in the same direction. A correlation coefficient of -1.00 means that there is a perfect negative correlation and the 2 assets always move in opposite directions. A correlation coefficient of 0.00 means that there is no correlation at all between the 2 assets. Also, a correlation coefficient of +0.80 is considered to be a strong positive correlation between 2 assets. A correlation coefficient of -0.80 is considered to be a strong negative correlation. Correlations can, and often do, change over time.
BTC and FX correlation coefficients
Currently on some daily (longer-term) timeframes, Bitcoin has strong correlation coefficients with commodities, such as lumber (+0.84), RBOB Gasoline (+0.93) and soybeans (-0.87). Therefore, its no surprise that Bitcoin also has high correlations with some commodity currencies. Below are a few examples:
AUD/USD began moving higher on September 30th, the same time Bitcoin began moving higher off its recent lows. On its way off the lows of 0.7170, the pair moved through resistance at the 50-Day Moving Average, horizontal resistance, a downward sloping trendline dating back to May 10th, and the 38.2% Fibonacci retracement from the highs of May 10th to the lows of August 20th near 0.7408. The current correlation coefficient on the daily timeframe is +0.84. Therefore, if traders are looking for a directional trade in AUD/USD, they can use the price direction of Bitcoin as a tool to help them determine the direction AUD/USD may move next.