A technical analysis indicator dubbed Bollinger Bands, signaling an explosion in Bitcoin (BTC) volatility, has caught the attention of crypto traders and analysts ahead of the June US inflation report.
“Bollinger Bands are tight. How tight? Squeezes of this caliber have only happened a handful of times in the past decade. Most squeezes like this have changed the market bias before the breakout,” analyst Josh Olszewicz tweeted early Wednesday, adding that a similar tightening of the bands was last seen in early January, just before the bitcoin bull market revival.
The so-called squeeze or tightening of Bitcoin’s Bollinger Bands has also caught the attention of John Bollinger, the indicator’s inventor.
Bollinger Bands are derived by placing volatility lines two standard deviations above and below the 20-day simple moving average (SMA) of the asset price. The bands are determined by the degree of price turbulence, with the narrowing or narrowing of the bands representing a contraction in volatility and the widening of the bands representing a volatility explosion.
When bands are tightening sharply, traders are preparing for a big move and usually trade in the direction that prices break the band. The logic is that during the consolidation, the market builds energy that eventually releases in both directions.
The most common way to track range is to split the range between the upper and lower bands using the price’s 20-day SMA.
Bitcoin’s Bollinger range has dropped to 0.04, its lowest level since early January, according to charting platform TradingView.
According to pseudonymous analyst Nunya Bizniz, range has only been a few times this low in Bitcoin’s 14-year history, and we could see a volatility explosion soon.
Tighter bands don’t always mean an immediate and noticeable explosion of volatility/clear direction in the market.
However, US CPI data, scheduled for release at 12:30 UTC on Wednesday, is likely to impact Federal Reserve interest rate expectations and add volatility to the markets.
According to economists polled by the Wall Street Journal, the year-on-year CPI is likely to have weakened to 3.1% in June from 4.0% in May, while the core reading has slowed to 5% from 5.3%.
A reading of 3.1% would bring the headline closer to the Fed’s 2% target, thereby weakening the case for continued rate hikes or monetary tightening that were partly responsible for last year’s crypto crash. In other words, Bitcoin could break out of the Bollinger Band squeeze if inflation data matches estimates.
Note that expectations for a sharp decline in CPI were bolstered by a report out Tuesday that showed used car prices, a key component of US CPI, falling 10.3% over the past year, finishing 10th consecutive monthly decline recorded in June.
As such, risky assets, including Bitcoin, can experience downside volatility when aggregate CPI and core counts come in higher than expected. Bitcoin was trading little changed at $30,630 at press time, according to CoinDesk data.
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