Technical Update – 3-23-18

The cryptocurrency markets may be acting a little slower than we have become accustomed to but this is normal. There are still opportunities though and you can find them by using basic technical analysis. Remember, the simpler the better!

I would like to point out a few things I am watching; each one on a different time scale. I highly recommend looking at multiple time scales for your own trading. Please note that all charts used are from cryptowat.ch.

Crypto is Correlated

Before I get into the analysis I would like to mention that the cryptocurrency markets have been fairly correlated lately. That is, the vast majority of coins are moving up or down at the same time. If bitcoin is down 5% in a day, chances are that 90% of the other coins are down as well.

A lot of people blame this on the fact that most coins trade against bitcoin and insist that if there were more USD pairings then this correlation would go away. In my opinion, though, this correlation would persist. After all, stocks are highly correlated with each other also and they are almost exclusively traded against the USD (rather than traded directly for other stocks).

Therefore, my analysis will be for bitcoin and my entry times for the vast majority of other coins will be the same time as I would enter bitcoin. I think this is worth bringing up because I have seen numerous people discussing this correlation on social media. Try to use it to your advantage!

Long Term View

First of all, let’s take a look at a long-term chart of bitcoin (weekly candles, below). Draw a line from the record high of $20,000 to the $17,000 rebound six weeks later, to the most recent attempt at breaking $12,000, and then extend the line through today. This is our downtrend line. Now, draw a line from the $6,000 low in early February through the recent $7,240 low. This is our uptrend line. Placing both of these lines on the chart forms a long-term triangle that traders will start watching soon.

The market will need to make up its’ mind soon! If you are bullish on bitcoin the price needs to stay above this line. Hopefully the price consolidates in the mid $8,000’s and then starts heading up. If you are bearish on bitcoin, wait for a clear break of this line and short when it is broken. If the price breaks down, traders will be eyeing the $6,000 price level last seen in February.

This is a long-term trend and there may be plenty of other shorter-term opportunities to trade in both directions while it plays out. But have this in the back of your mind.

Market Psychology

Now let’s zoom in a little bit to see the structure of the market over just the last couple months. What I am trying to do is to determine how people who bought bitcoin at different points in time are feeling today. The people who bought in at $6,000, for example, are happy as they are still up ~45%. The people who bought between $11k and $12k and feeling a bit discouraged; down perhaps 20-25% over the last few weeks. These are the people at the extreme end of the range.

Most buyers got in somewhere between these prices. The current price of $8,500-$8,700 is close to the middle of this range and is important. As you can see in the chart, there have been multiple times over the last two months where $8,500 has acted as support or resistance. Watch this level carefully!

We have fallen slightly below $8,500 a couple times in the last few days, but the market has recovered quickly each time. If the market fails to recover quickly, then the trend will be down. Notice that below around $8,000 there has not been much opportunity to buy. This means that if the price falls below $8,000 almost everybody who has bought in the last two months will be in the red and prone to panic selling – and the market may look to re-test $6,000. Also, when trying to figure out what other traders are thinking, I recommend weighting the most recent price action higher than prior price action.

Short Term Strategy

Finally, let’s look at a recent short-term trading opportunity. On March 16th the price of bitcoin began to drop rapidly. Once below $8,000 on March 17th, many traders began to think that the market would drop straight back to $6,000, and this fear caused the market to fall to around $7,250. Over the course of two days a clear downtrend line formed on the hourly charts.

The worst of the sell-off occurred on the morning of March 18th as many US traders decided to sell their coins in a panic as they woke up for the day (I have noticed this to be a recurring theme with the sell-offs over the last few months). The market slowly recovered for a few hours after the bottom.

The absence of new lows, in addition to strong market depth on the bid side, made it clear that the price just did not want to go lower. Once the downtrend line on the hourly chart was broken to the upside, the price quickly rallied all the way back to $8,500. In my opinion, this was the best use of TA for a short-term trade over the last couple weeks. Ethereum and Litecoin, in addition to many other altcoins, would have been a more profitable way to trade this rebound.

Happy trading!

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