Willy Woo is a pioneer in on-chain analysis and the creation of Bitcoin indicators based on actual blockchain data.
“The orange currency appears a tad undervalued,” he said in a recent tweet while evaluating the BTC supply shock indicator.
Willy Woo made the statement on his chart in an ironic manner, as the indication he discussed appeared to be very oversold. The researcher exhibited the Highly Liquid Supply Shock Oscillator in the chart and compared it to the price history of Bitcoin. This indicator is currently at an all-time low, as can be shown (ATL).
“Not a terrible time for investors to wait for the law of mean reversion to play out,” argues Willy Woo. He’s talking about a technical analysis theory that says asset price volatility and historical returns will eventually return to the long-term average or mean level for the full data set.
In the instance of the oscillator in issue, this would indicate that the chart will eventually bounce upward. This would result in a rise in the supply of highly liquid products. What is the relationship between this method and the price of Bitcoin in the past?
BTC Pricing Vs Lows in the Extremely Liquid Supply
First and foremost, consider the times when the very liquid supply shock oscillator was heavily oversold. The lows in the indicator are compared to the price of BTC in the chart below.
The lows on the supply shock oscillator coincided with macro lows in the BTC price in three out of five occurrences. In cases 1, 3, and 4, this was the case. The oscillator bounced off the bottom, and the price of Bitcoin never returned to those low levels.
However, in two out of five situations, the oscillator’s low level did not correspond to the absolute bottom of the BTC price. In examples 2 and 5, this occurred. True, the indicator’s low level signified a local bottom for Bitcoin’s price, but the price later fell considerably lower (orange lines). The succeeding BTC bottoms, interestingly, were reached at greater oscillator settings.
Correlation of Trends
Another method to look at the association between Willy Woo’s two charts is to look for prospective trends. If the oscillator’s bottom coincided with the bottom of the Bitcoin price, one may expect both charts to begin an uptrend once it was reached.
Indeed, there are numerous examples of such a positive association in historical data. They usually entail a dynamic rise following a long period of accumulation. Two such instances occurred during the 2012-2013 bull market, two in 2016-2017, and two in 2020-2021. (green areas).
However, a boost in the highly liquid supply shock oscillator did not always result in price gains for Bitcoin. We can identify three examples of this: two in the 2014-2015 bear market and one in the 2018 bear market. The Bitcoin price was either decreasing or moving sideways at the moment. This confirmed the existence of a long-term bear market.
Final Verdict
Willy Woo’s supply shock indicator has reached its ATL today. For Bitcoin prices, this might be a bullish indication. However, in order for it to be validated, the indicator must first return to the mean.
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