March 28, 2024

Local resistance instead of long-term support - Technical update October 11, 2022

This week, regular Technical Roundup contributors discuss the ongoing struggles in the Bitcoin market in the area$20 thousandand a tantalizing range of $1200-1400 in Ethereum/$. From traditional markets, let's update our analysis in relation to what appears to be a bearish retest in the S&P500 index today. The review concludes with the author’s recommendations on how not to lose a lot when volatility returns to the market (at least soon).

https://coinmarketcap.com/coins/views/all/

$20k continues to serve as resistance for Bitcoin

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The $20k level continues to act more like resistance than support, which is quite unfortunate.

This is a key support level, but the marketpreferred an inexpressive lateral movement to a noticeable or somewhat significant rebound from it. Even as stocks showed strong upward momentum against the main trend, coinciding with a rally in Ethereum on the back of the upcoming activation of The Merge, the Bitcoin market only made it as far as around $25K before pulling back.

Bitcoin couldn't even offer&#171;bearish&#187; retest $30 thousand, and it makes a rather dull impression. Weak demand in the $20K area is most noticeable on the daily timeframe. The market is currently testing the range low at $19K for the hundredth time and continues to find resistance just above $20K.

Essentially, support for a local range minimumgradually wears out, while the level, which should serve as a cyclical support, is working out more like resistance. The longer the market stays in this multi-month range, the more valid the $6,000 in 2018 analogy will look, especially if volatility continues to shrink in this manner.

To turn this situation around, it doesn’t take mucha lot of. As we've mentioned in previous reviews, a weekly close above the $21k resistance would be at least a decent start. Or an unsuccessful breakdown of support (followed by a confident recovery above $19 thousand) could also give hope for a reversal to growth.

In the meantime, the market continues to use the area$20k as resistance and move along the low of the range, the support of which is looking less and less convincing, and volatility continues to shrink.

We hope you will forgive us for not being enthusiastic about the current BTC/USD setup.

Ethereum also stuck below last cycle highs

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In ETH/USD, the situation is not too different from BTC/USD. Ethereum trades below an implied key level and finds resistance in the area of ​​the previous cycle high at $1400.

Again, &#171;technically&#187; to wrapthese key levels from resistance to support, not much is needed. In the case of Ethereum/dollar, this argument looks even more clear. $1400 is the best weekly and daily level on the chart. This makes it a prime candidate for determining medium-term direction, and the market is currently stuck below it. As for support, on several timeframes it is the $1200 area.

Ethereum/dollar is seeing the same volatility squeeze as bitcoin, and the market is essentially being squeezed between the mentioned levels.

Above $1400 the market will look much betterthan now. Below $1200, the market will look much worse than it does now. In a sense, this is not without convenience. We will have a stronger (or at least some) opinion about the direction of the market when, with the return of volatility, it overcomes one of these significant levels, whether it is strength above $1400 or weakness below $1200.

Retest of resistance in S&amp;P500

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The S&amp;P500 finds resistance at the monthly cluster level of $3710–3760.

Last week, we talked about the possibility of such a bearish retest and that, if anything ruins the upcoming holiday in the crypto market, it will be the stock market.

The index continues to trade in fairly close accordance with the technical levels, and judging by what we see now, the broken support on the monthly timeframe is working as resistance.

Recovery above $3710-3760 on resultsof the month (or at the weekly close if you are more aggressive) will look like a reason for optimism, signifying the first failed breakout in the entire current bearish trend.

Reaching next support on hightimeframe at $3240 (or $3500, if you are an optimist and count from the high of the monthly cluster) will also shift the balance of probability from the continuation of the downtrend in favor of a rebound.

In the meantime, support levels are breaking through andalready act as resistance. Any downward acceleration in the S&amp;P500 will most likely drag the crypto market with it, especially considering that the ~$19 thousand level has already been tested many times.

As for the economic catalysts for thisweek, then on Wednesday the US will publish the producer price index (PPI), and on Thursday - the CPI. Any positive result is likely to bring at least short-term relief to the markets, but if the data is in line with expectations (or worse), then we expect it to be a catalyst for downward volatility.

Volatility Compression + News Agenda Risks = Your tight stop losses will be hit.

Making trading decisions after these obvious catalysts is almost certainly preferable to gambling ahead of these events.

On surviving a change in volatility

The compression of volatility in the crypto market is obvious.Only in today's review, we mentioned this about twenty times. If we were smarter and more competent, then, probably, we would have given some parameters of the implied and data on the realized volatility for solidity. But it's not, so you'll have to take care of it yourself or take our word for it.

When the market is trading in a range like thisbeen going on for some time, the revert setups work pretty well. Buy at the low of the range, sell at the high, use bad breakouts, repeat until the range move is exhausted.

As the range of motion is reduced,traders often find themselves tempted to enter early and/or increase their position size. And this is not necessarily unreasonable: as long as the mean reversion setups work, they make sense to stick with.

However, from our point of view, we are approachingto the point where these setups become a lot less attractive. Chasing those short moves ahead of a spike in volatility is like collecting change in front of an oncoming ice rink. Mean reversion works and can generate some profit until the market regime changes.

When this happens, in most cases youyou get out of position, giving the market a significant and probably uncomfortable part of the profit earned in the range. For some, this is normal, but this risk must be recognized.

Simple example:working out a 5% deviation from the average in BTC/USD, you could get good results. But what happens to your setup if the market moves out of the range by 20%? Nothing good. Not to mention, liquidity becomes very scarce with such sharp movements, and the actual execution price for your stop loss is likely to be much worse than what you planned when calculating the risk on the position.

Typically, the greater the consolidation, the strongerultimately there is momentum when leaving it. When the range is finally broken, not only are the stop losses of those who traded in the range triggered—and at roughly the same level—but momentum-starved traders trading the breakouts also enter on the same side of the market. In &#171;bullish&#187; example, short mean reversion positions are closed (through buying) + momentum traders open their positions for a breakout (even more purchases) + all this happens at approximately the same levels = increased demand for liquidity in one direction = large price jump.

Buying at $6,000 was a great deal—until it stopped.

In any case, several practical conclusions can be drawn from what has been said.

First, when volatility decreases, it makes sense to reduce the size of positions or be more conservative, since the price of a mistake is likely to be higher than before.

Second, when a breakthrough materializes, it is important not toit is too early to try to bet against this move by momentum. Give the momentum the necessary time and space to play out your aggressive dynamic and return to a state that is closer to a balance between sellers and buyers.

Third, if you still want to bet againstmean reversion trend, make sure your setup is really good. This usually implies some combination of high confidence, a sharp move in which the market hits new and better levels, and signs of slowing momentum.

Fourth, if you bet against such a moveyou're not going to, plan where (probably some distance away) the next significant support and resistance areas are and sketch out in your mind a plan for how you will trade these new levels. Either that, or you need to wait for an unsuccessful breakout (with a recovery above the breakout level) and trade in a new range. Be extremely careful when trying to bet without clear levels and criteria away from the boundaries of the ranges.

Finally, large spikes in volatility havetendency to break the situation, and for the reasons mentioned above (as well as wider market maker spreads with increased risk of inventory depreciation during periods of high volatility), the price experiences large movements. It might be a good idea to put a few &#171;greedy&#187; orders slightly above/below critical levels in order to have a chance of their unlikely execution in case of increased movement amplitude due to cascade liquidations.

 

BitNews disclaim responsibility for anyinvestment recommendations that may be contained in this article. All the opinions expressed express exclusively the personal opinions of the author and the respondents. Any actions related to investments and trading on crypto markets involve the risk of losing the invested funds. Based on the data provided, you make investment decisions in a balanced, responsible manner and at your own risk.

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