If you’re a newcomer to this site the charts may seem confusing at first. The purpose of this page is to better explain both the Stability Charts and the Rainbow Charts.
These originally started with the observation that all major bubbles had grown off the back of a period of high stability.
To calculate the 10 day volatility measure we take hourly Bitstamp data and calculate the standard deviation of the log of price for the last 240 hours. (10 days x 24 hours)
We then take the inverse of this to calculate stability instead of volatility. The chart above shows the hourly measure of volatility for a range of different time frames.
The chart above simply takes a weighted average of the stability measures between 7 days and 31 days. The lower bound of 7 days is to ensure any natural weekly variation in volatility is smoothed out. The upper bound of 31 days is largely arbitrary. However, different day ranges are available to give a complete picture as needed.
From the initial stability charts we have historic instances of stability peaking and the corresponding price action that follows from this. The following chart plots the post-stability movement for the next 3 months, indexed around the most recent break from stability to see how current action compares with previously:
Largely unrelated to the stability charts are the Rainbow Charts. These are simply trend lines, with the yellow bar in the middle representing the average price movement over a given date range. For most of these, each coloured bar is half a standard deviation wide.
Generally, any deviation north of the rainbow is an indicator to sell, while falling down is an indicator to buy. In the example below, there was clear over-heating of a bull trend around early November, suggesting a reversion towards the mean was likely:
Unfortunately this indicator is not perfect. There are times when price will leave the rainbow meaning the trend is broken and a reversion is not guaranteed. This will depend on how long a trend has been present for, as well as any underlying changes in the Bitcoin ecosystem.
The number in brackets, such as 0.751% above, is the average daily change in price over the given date range and is therefore the slope of the trend line.