Range-Bound, Alts & Legacy Markets

Letter Nine

CryptoYoda

Dear readers,

Bitcoin has traded in range for more than two months at this stage, both testing as high as $10,400 and as low as $8,600. Due to the fact that within this two-month time period traders have continued to position themselves in anticipation of the final move to come, it is natural to expect that both Bulls and Bears are considerably trapped at this stage. The longer the range, the more traders position themselves, the more explosive the breakout will be when it finally occurs, as one side finally covers their losses.

The range itself presents a problematic situation for most analyst interested in longterm trends. Due to the nature of trading ranges, both bullish and bearish signals tend to be invalidated. We saw that with a failed break below the presumed trendline, we also saw it with the rejected breakout above $9,400. From these two failed setups alone we can assume that both sides are critically trapped, but also that signals within this range tend to be inaccurate and not very useful to anticipate the next move to be happening. This is not an unusual thing to be witnessed within a trading range, but it certainly does not add any clarity to the situation at hand.

One reason for this uncertainty in the market is the giant outside bar printed in early June. All following bars since then happened to be within its range.

While trends can form within such outside bar range, their significance is weakened until the range has been exited in one direction or another. Price is in the truest meaning of the word range-bound. As long as the range has not been abandoned with a strong breakout and close over either boundary, price tends to oscillate between both extremes, continually trapping both sides of the market, accumulating evermore explosive force for the final break.

Within this given range, a smaller downtrend has formed, characterized by Lower Highs and Lower Lows:

While such local downtrend signifies selling pressure only a final resolution of the range will bring clarity to market participants. Trends within a range simply cannot be trusted in the same way as a trend developing free-of-range and must be taken with a grain of salt. This local downtrend can also easily morph into a local uptrend and test the upper boundary without necessarily leading to any meaningful breakout.

After crossing upwards in early June the EMAs 100/200 remain supportive underneath current price, hovering in the area between $8,947 and $8,658. This level will remain a key-area protecting the lower boundary of the range. A close below the EMAs and the lower boundary will put Long positions entered within the range in deep red. In the same way, a strong close above the upper boundary will put Short positions under immense pressure.

No Trade Range

As long as price is range-bound price will remain in no-trade range. Instead of positioning early and anticipating the upcoming move it would be wiser to wait for a break of either boundary and ride the developing trend from there with more confirmation and certainty.

Bull Case

Taking out last local High around $9,490 would put in the first Higher High of the local trend, aiming to retest of the upper boundary. Depending on the strength, volume and speed of this move further conclusions can be drawn at that point.

The final break of the $10,500 High would be an excellent entry Long, as not only the range has been exited at this point, but several Highs are stacked above each other. The dynamic with a break of this level is as such:

  • Shorts that entered within the range are forced to exit their positions.

  • Traders who are currently Flat and have no position would enter Long, anticipating a longer trend beginning from there.

  • Shorts would not only buy to square their losing positions, but potentially turn their positions to Long, thus buying twice, driving up the price.

At this point, the demand would outweight supply by far, leading to a spike on volume and the beginning of a new uptrend for the remainder of the year and perhaps beyond.

Bear Case

The break of the Low at $8,827 would put in another Lower Low in this local downtrend. As downside momentum increases with the local downtrend continuation, it could open the gates for a potential takeout of the lower $8,600 Low/boundary. The relative proximity of both lows could further add to the momentum, leading to a cascade downwards.

Breaking the $8,600 lower boundary could take catastrophic proportions as buyers would panic-exit the positions they have previously entered within the range. In the same way, Flat traders could take this as an opportunity to short, anticipating that more retesting is needed before another attempt to break the final $10,500 key level.

A Range is a Range is a Range

Although these indicated minor levels could be used as an entry I would rather not. The risk of being caught in the noise of the market is too high as long as trading within the range continues. The aim here is solely to accumulate more information that can be gathered with either break of these respective levels.

Concerning the question whether or not we are in the disbelief stage before the real bull-run commences, or whether this is a top before more consolidation follows can only be answered by leaving the range on either side of the boundary for good.

Correlation with Legacy Markets

One of the most concerning events at this time is Bitcoin’s close correlation with traditional markets. On several occasions in the past weeks, strong drops in the Dow or SPX led to Bitcoin immediately following with a violent breakdown, as happened on July 9th:

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It must be assumed that if legacy markets continue to fall in the future, Bitcoin will likely follow in its footsteps. A key question here is whether or not we see a significant second wave of lockdown due to Covid and the potential implications for economic activities around the globe. Purely from a chart perspective it would make a lot of sense for traditional markets to continue their path downwards as key resistance has been tested twice, while having been rejected on both occasions, at least for the time being:

It is however worth noting that charting traditional markets is a dangerous play, as due to endless printing of money the market is being manipulated by all means. Thus I am placing little significance on the price action in those markets, while being open to the possibility that a sudden breakdown would have its negative implications for most markets and Crypto in general.

Alts

Across the board, altcoins have rightfully received a lot of attention in the past weeks due to BTC dominance dropping. Personally I am very cautious about alts at this stage as Bitcoin could and likely will end these moves as it often did in the past. If we think about it, no matter in which direction the current BTC range is being exited, violent movements will occur. In most cases turbulent movements lead to alt-holders selling their positions, leading to more consolidation in alt-pairs across the board. Such scenario would however provide valuable information about the current stage of the market, from which further conclusions can be drawn.

Conclusion

The Bitcoin market continues to trade in range. Caution is advised as long as price remains in this range, and all signals should be taken with giant grain of salt. Unless $10,500 is taken out the bias remains in favor of the Bears and further consolidation. Alts will likely take a hit once Bitcoin shows its true face in form of turbulent moves in either direction, thus more patience is needed. Impact of sudden moves in traditional markets on Bitcoin should be taken into consideration.

Remaining observing and patient for the time being,

CY

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