A Purely Technical Market

Long time readers may recall that we regard Bitcoin and other liquid big cap cryptocurrencies as secondary media of exchange from a monetary theory perspective for the time being. The wave of speculative demand that has propelled them to astonishing heights was triggered by market participants realizing that they have the potential to become money. The process of achieving more widespread adoption of these currencies as a means of payment and establishing appropriate (and potentially more stable) exchange rates relative to state-managed fiat currencies is still underway.

 

A snapshot of cryptocurrency market caps as of June 12 – they made local lows two trading days later. After the small rebound since then, market caps are now slightly higher than those shown on this map, but it is still roughly in the right ballpark. Note: XRP has the third highest market cap, but we do not regard it as a true “cryptocurrency”. It is not a decentralized currency at all, it is a token under control of the company that issued it (it can be traded though and for a while there was a big burst of speculative demand for it, oddly enough mainly from South Korea). Bitcoin Cash (BCH) is the most important fork from the original BTC blockchain and in our opinion the better Bitcoin. It has a much larger block size, avoiding the scaling problems BTC encountered late last year (which were associated with long waiting times for transactions and soaring fees). BTC still enjoys a first mover advantage and trades at a far higher level as a result. There is no logical reason why it should, but that is a topic for another occasion.

 

At present the above mentioned process is still at a very early stage, hence speculative trading remains the dominant activity. Other use cases continue to be developed at a fairly rapid clip and an entire new economic sector surrounding blockchain technology and cryptocurrencies has emerged (currencies remain the major application for blockchain technology for now, but many other possibilities are explored). If and until the next stage is reached, cryptocurrencies are primarily one thing though: exciting trading sardines.

It is particularly difficult to determine by what yardsticks to evaluate virtual currencies. Similar to gold, they have no P/E ratio, so to speak (gold at least has a lease rate though). Some people argue that one should compare the market cap of BTC to that of the outstanding supply of US dollars to arrive at a long term target for the exchange rate. We don’t believe it is that simple – and whether such comparisons make even a modicum of sense depends on the still uncertain prospect of BTC indeed becoming a general medium of exchange one day.

Moreover, as we noted above with respect to the BCH fork, there is e.g. no good reason why BCH should trade at a large discount to BTC (it would actually seem to make more sense if it were the other way around). There is no rational explanation for the valuation gap, except for the first mover advantage argument. Obviously this is not something that can be quantified.

Our point is that these markets are driven almost exclusively by psychological factors. In other words, they are purely technical markets. The only things worth analyzing are technical indicators and market sentiment. The latter can only be done via anecdotal evidence, as quantitative positioning indicators  that could be used for this purpose don’t exist as of yet (note that inter alia no commercial hedgers are active in CBOE BTC futures).

We don’t regard that as a problem; trading exclusively on technical signals is perfectly fine with us. Of course, traders had it very easy when the bull market  – or bubble if you prefer – was still going strong. One could not make any fatal mistakes by buying during this time period, since all timing mishaps were eventually “bailed out” by the market.

This is no longer the case now that the most recent bubble iteration has burst. Timing has become rather important if one wants to make money as a trader. Despite overarching bear market conditions the crypto markets remain attractive for traders though, as very high volatility in both directions continues to persist.

 

Watching out for Divergences

In order to gauge extremes in market sentiment, it is worth following the headlines of articles on market action and the associated comment sections on major cryptocurrency-focused web sites. Short term lows tend to be close when the frequency with which absurd upside targets are pronounced by assorted “experts” and/or fund managers talking their books subsides and headlines mentioning downside targets begin to appear. At the same time negative sentiment expressed in comment sections needs to be palpable.

At that point it is usually worth looking closely at the charts. Consider the chart below, which compares BTC, the leading cryptocurrency (which all the others tend to follow) with BCH and LTC (Litecoin, one of the earliest BTC competitors) during the recent bear market period (note: this snapshot was made a few hours before publication of this article).

 

We recently discussed divergences in the gold sector. A similar analysis can be applied to cryptocurrencies. Since selling off from its December 2017 peak, BTC has put in three short term lows. Both BCH and LTC have diverged at the second and third low. On occasion of the second low, BCH put in a lower low vs. a higher low in BTC and LTC, and on occasion of the recent third low it put in a higher low vs. both, while LTC put in a lower low relative to the first low. This creates a low risk buying opportunity, as the recent lows can be used as stops.

 

We should mention that ETH diverged from BTC as well, with the divergences mimicking the ones seen in BCH:

 

ETH, daily – Ethereum also made a lower low in April relative to the February low and a higher low in June.

 

During the bull market phase daily trading volume was a fairly reliable indicator helping to pinpoint short term correction lows. As a rule of thumb, one simply had to wait for reversal candles to appear that were accompanied by extremely high trading volume. Often these reversals were immediately followed by a resumption of the rally, sometimes the initial correction lows were retested on lower volume first. In any case, it was easy.

However, in the bear market phase trading volume has experienced a steady downtrend and on daily charts one struggles a bit to identify any remarkable stand-outs (occasionally they still appear, such as in LTC in April at the beginning of the last short term rally). It is still worth watching volume, but one has to do it in a different time frame.

The chart below shows a snapshot of BTC and BCH hourly charts taken earlier today. As these charts illustrate, panic selling waves, lows and subsequent upturns still tend to be associated with strong expansions in short term trading volume. Reversal candles so to speak “gain credibility” when they occur in conjunction with strong trading volume – this makes it more likely that a short term trend change has indeed occurred.

 

BTC and BCH hourly – expanding trading volume during panic selling waves, on reversal candles, as well as on subsequent rebound candles.

 

Caveat Emptor

If one looks at a longer term chart of BTC, it is immediately obvious that there are several important lateral support levels situated well below current levels –  the next ones are two former resistance points that later became support, at $5,000 and $3,000. Given the inherent difficulty of evaluating these currencies and the large size of previous corrections, it is definitely possible that one or both of these levels will be seen again.

Despite this caveat, it seems to us it is worth taking low-risk trading opportunities when they appear. “Low risk” in this case means: risk can be strictly defined by recent lows which are not too far off current levels and can be used as stops. As long as these lows hold, a sizable rally is possible, or rather probable. If these lows are violated and a stop-loss is triggered, one takes a small loss and waits for the next opportunity to emerge (the first of the above mentioned longer term support levels will become a likely target in that case).

If a rally develops, the initial stop has to be changed into a trailing stop that takes into account that considerable short term volatility will accompany an upside move as well. If divergences such as those discussed above become manifest in the course of a rally (which happened prominently in December 2017 – January 2018 between BTC, ETH, XRP and a few other “alt coins”), it is advisable to immediately tighten trailing stops.

Why is it worth it? Consider the rally from the April low: BCH had the best news flow during this rally and more than tripled in price in about six weeks. That is nothing to sneeze at, even if it was “just” a bear market rally.

 

A Long Term Sentiment Indicator

Lastly, here is one more sentiment indicator suggested in a recent article by Bianco Research on the May-June sell-off (requires registration). This strikes us as a longer term indicator, i.e., it is probably not very useful for short term timing purposes, but it seems definitely worth checking it out from time to time – namely Google search trends related to cryptocurrencies. Not surprisingly, the indicator is largely a function of price trends.

 

Google search traffic indexes for the market cap leaders BTC, ETH and XRP and “cryptocurrency” generically. As prices have declined, so have searches. How useful this is as a contrarian indicator remains to be seen, but we suspect it is probably of medium to long term significance.

 

Charts by: Bianco Research, cryptowatch

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Venezuela – An Economic Catastrophe in Charts
      The Final Stage of a Crack-Up Boom For economists the dire downward spiral of Venezuela's economy holds the same fascination black holes hold for physicists. Both illustrate what happens amid the most extreme conditions imaginable. It is thought that this may potentially provide clues of a more general nature. The remnants of massive imploded stars are inanimate and many light years distant; regardless of how violent conditions in their vicinity are, they cannot touch us. Unfortunately,...
  • The Degrading Facts of a Fake Money Hole in the Head
      Squishy Fact Finding Mission Today we begin with the facts.  But not just the facts; the facts of the facts.  We want to better understand just what it is that is provoking today’s ludicrous world. To clarify, we are not after the cold hard facts; those with no opinions, like the commutative property of addition. Rather, we are after the warm squishy facts; the type of facts that depend on what the meaning of ‘is’ is.   Fact-related pleas... [PT]   The facts,...
  • Thirteen Reckonings Hanging in the Balance
      A Fake Money World The NASDAQ slipped below 8,000 this week. But you can table your reservations.  The record bull market in U.S. stocks is still on. With a little imagination, and the assistance of crude chart projections, DOW 40,000 could be eclipsed by the end of the decade.  Remember, anything and everything’s possible with enough fake money.   Driven by a handful of big cap tech companies, the Nasdaq Composite has made new highs – but the broad market (here shown in...
  • Jayant Bhandari - The US Dollar vs. Other Currencies and Gold
      Maurice Jackson Speaks with Jayant Bhandari About Emerging Market Currencies, the Trade War, US Foreign Policy and More Maurice Jackson of Proven & Probable has recently conducted a new interview with our friend and occasional contributor to this site, Jayant Bhandari, who is inter alia the host of the annual Capitalism and Morality seminar.   Maurice Jackson (left) and Jayant Bhandari (right)   A wide range of topics is discussed, from the strong US dollar and...
  • Gold-Silver Ratio Message - Precious Metals Supply and Demand
      Fundamental Developments Last week the price of gold fell three bucks, and that of silver fell a quarter of a buck. But let us take a look at the supply and demand fundamentals of both metals. Also, we have an interesting development in the gold-silver ratio, a topic we have not addressed in a while. First, here is the chart of the prices of gold and silver.   Gold and silver priced in USD   Next, this is a graph of the gold price measured in silver, otherwise...
  • US Equities – Approaching an Inflection Point
      A Lengthy Non-Confirmation As we have frequently pointed out in recent months, since beginning to rise from the lows of the sharp but brief downturn after the late January blow-off high, the US stock market is bereft of uniformity. Instead, an uncommonly lengthy non-confirmation between the the strongest indexes and the broad market has been established. The chart below illustrates the situation – it compares the performance of the DJIA (still no new high since January, although...
  • September – The Most Dangerous Month to Invest
      The Biggest Crashes in History Happened in September and October In the last installment of Seasonal Insights we wrote about the media sector – an industry that typically tends to perform very poorly in the month of August. Upon receiving positive feedback, we decided to build on this topic. This week we are are discussing several international markets that tend to be weak during September and will look at what drives this recurring pattern.   Mark Twain, a renowned...
  • Honest Work for Dishonest Pay
      Misadventures and Mishaps Over the past decade, in the wake of the 2008-09 debt crisis, the impossible has happened.  The sickness of too much debt has been seemingly cured with massive dosages of even more debt.  This, no doubt, is evidence that there are wonders and miracles above and beyond 24-hour home deliveries of Taco Bell via Door Dash.   The global debtberg: at the end of 2017, it had grown to USD 237 trillion. Obviously this is by now a slightly dated figure, as debt...
  • Gold-Silver Ratio Hits 10-Year High - Precious Metals Supply and Demand
      Fundamental Developments The price of gold dropped five bucks, and that of silver 40 cents last week. But let’s take a look at the supply and demand fundamentals of both metals. Also, we continue to follow the development in the gold-silver ratio.   One can buy a lot of silver for one's gold these days. Silver has become extraordinarily cheap, but keep in mind that it was even cheaper vs. gold in the early 1990s (see the section on silver further below for the details)....
  • Corporate Credit – A Chasm Between Risk Perceptions and Actual Risk
      Shifts in Credit-Land: Repatriation Hurts Small Corporate Borrowers A recent Bloomberg article informs us that US companies with large cash hoards (such as AAPL and ORCL) were sizable players in corporate debt markets, supplying plenty of funds to borrowers in need of US dollars. Ever since US tax cuts have prompted repatriation flows, a “$300 billion-per-year hole” has been left in the market, as Bloomberg puts it. The chart below depicts the situation as of the end of August (not...
  • Dubious Prophecies & Perverse Incentives - Precious Metals Supply and Demand
      Suspect Predictions, Ill Wishes and Worthwhile Targets of Scorn This price of gold fell three bucks, and the price of silver fell ten cents last week. Perhaps because of the ongoing $150 price drop so far since April, we saw some doozy email subjects and article headlines this week.   Panic on the inflation Titanic. [PT]   One notable one, from the man who confidently asserted we will have hyperinflation by the end of the year — in 2009 — now says that the...
  • Gold and Gold Stocks – Small Rays of Light in the Vale of Tears
      A Rebound Gets Underway – Will It Have Legs? Ever since the gold indexes have broken below the shelf of support that has held them aloft since late 2016 (around 165-170 points in the HUI Index), the sector was not much to write home about, to put it mildly. Precious metals stocks will continue to battle the headwinds of institutional tax loss selling until the end of October, to be followed by the not-quite-as-strong headwinds of individual tax loss selling in the final weeks of the...

Support Acting Man

Item Guides

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com