Hey traders! It’s been an exciting few weeks for the markets. Two weeks ago BTC was stagnant in the $6,500 – $7,000 range and the market sentiment was extremely negative. The number of shorts on Bitfinex were at record levels. We were still under the longer-term downtrend line originating at the record high in December.
Now things are different. Bitcoin rallied $1,000 in an hour last week. A lot of the people buying were short sellers closing their positions (either from stop loss orders being hit or liquidations from margin calls). This is called a short squeeze.
In addition to short sellers closing their positions, there were also a lot of people waiting on the sidelines to buy when market conditions looked better. They helped propel the market and keep it up as many of them missed the opportunity to buy near the bottom.
Breaking The Trend
As you can see in the chart below (from cryptowat.ch) the rally over the last week pushed the market above the long-term downtrend line we have been watching for a while. This is a great signal for bulls! The fact that the market was unable to fall below the February lows is another bullish sign.
Although it is unlikely for Bitcoin to immediately rally to a new high the short and medium-term time frames look good. I would expect the market to take a while to consolidate around current price levels or slightly higher.
BTC Isn’t King?
As good as Bitcoin has done over the last two weeks (up about 25%) most of the other cryptocurrencies in the Top 50 have done better. This is normal from a historical perspective as mentioned in previous posts. Ethereum (pictured in the chart below) is at $590, up from a low of $360. That’s a 60% increase. Litecoin is up around 40%. Some coins that had an extremely harsh sell off over the last few months, such as Ripple, are up nearly 100% off their lows.
What Do The Depth Charts Say?
To determine the sustainability of a price rally I always look at the depth charts. The depth chart for Bitcoin on GDAX is shown below. The green (buy side) looks strong and there is little evidence of spoofing so I would expect prices to hold above $8,000.
If the price continues to increase I will watch the depth charts carefully for signs of either the buy side weakening and becoming thinner (indicating that most people who want to be in are already in) or the sell side stregthening (indicating that a lot of people are planning to take profits soon). Apply the exact same analysis to your other coins.
Wrapping It All Up
A final note of caution. Many times a coin will pull out of a downtrend and spike very hard, just to crash again and spend more time consolidating. Buyers can become too optimistic and bid the price up too fast. The perfect example of this happened in 2015 when Bitcoin’s downtrend, beginning a year and a half earlier, was broken.
As you can see in the chart above (from bitcoincharts.com) the price of Bitcoin was at $240 at the beginning of October 2015. People were still worried the price could fall and they were hesitant to buy. But when the price began moving up towards $300 at the end of October everybody jumped in at once. The price spiked to $500 (a 100% gain in a month). The move was unsustainable and fell back to consolidate in the lower $300’s for a few weeks. The market is a lot different now than it was in 2015 but a pattern like this is certainly not out of the question. Good luck!