BTC and ETH Regression to the Mean - September 2023 Update

In todays TA I'm going to be continuing a series of analyses I began some months ago. I'll recap some important terms here but for a full recap please see this post going over why the MA 1000 is a useful indicator for baselines. I'd like to emphasize that the MA 1000 is not "the" baseline but rather a baseline.

• The Moving Average (MA): The MA is a stock indicator commonly used in technical analysis, used to help smooth out price data by creating a constantly updated average price. The number that follows "MA" denotes how many data points are being used. So when applied to the daily chart, 1000 days of data are being used.
• Regression to the Mean: In statistics, regression to the mean is when extreme events often regress back to the average. In trading, this is often called a correction. What we're going to see are not only corrections, but also over-corrections.

• Why use the MA 1000?: This is where regression to the mean comes in. The MA 1000 is not commonly talked about but is an important trend line to consider in the greater scheme of things. It rarely comes up because it rarely needs to be brought up in the world of day-trading. It is however very useful for long term targets. Also, the more data points you have to inform a mean/average, the more reliable you can consider it. You may then ask why not the MA 2000? The reason is because you have to stop at a certain point. Eventually, you get to a point where you have enough data to inform you where the mean likely is. There is also the central limit theorem which you can test here. Basically, at a certain point things will revolve around the mean and rarely deviate too far from it for too long. For our purposes, we can think of the MA 1000 as an approximate of the mean.

  • MA 1000 = blue
  • MA 200 = yellow
  • MA 50 = red

Alright on with the show!

BTC's MA 1000 on the Daily Chart

https://preview.redd.it/0noh2gf0numb1.png?1804&format=png&auto=webp&s=500548898e735d6e875475395a8db38560ba25ac

ETH's MA 1000 on the Daily Chart

https://preview.redd.it/t9aidcz1numb1.png?1800&format=png&auto=webp&s=5d652e047ba1d3634cdc695e8e423d2be26c0625

In my last post, I noted that

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> What we're also beginning to see in ETH's case is that its MA 200 is going to be meeting its MA 50. These usually lead to a breakout, but in which direction I couldn't say.

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It seems that the breakout was a downward one. We're also now seeing the same pattern take shape in BTC, where the MA 50 will be crossing the MA 200. Will the same thing happen here? I couldn't say one way or the other. Both BTC and ETH have deviated from their MA 1000 going further below it. If we see regression to the mean play out, we can reasonably expect prices to regress back towards it over the long haul, however getting their may be a bumpy ride. Generally speaking though, we also have not yet seen BTC and ETH deviate too far from their MA 1000 and this is still within 1 standard deviation from their MA 1000. See below for what 1 standard deviation from the MA 1000 looks like for both BTC and ETH. The variability plotted is insane, but this is the range.

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BTC 1 standard deviation plotted from the MA 1000

https://preview.redd.it/7sif109suumb1.png?1801&format=png&auto=webp&s=34e3ce703d01f8d10999c28b5628e89d12884d33

ETH 1 standard deviation plotted from the MA 1000

https://preview.redd.it/jslucgbuuumb1.png?1809&format=png&auto=webp&s=10739031ab80d1465cd40c5ae7303925f8031988

This post will *not\* be making any predictions about where prices will go. Instead, this post is emphasizing that prices in crypto seem to follow statistical concepts such as regression to the mean. From what we can see, prices do not like to deviate too far from their mean for too long, and that any drastic deviations from the mean are eventually met with correcting back towards it.

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That's it, I hope you enjoyed!