Looking for the Santa Rally
Bitcoin is looking close to breaking its downtrend but what are the signs?
Last week:
Inflation fears dominated
Investor sentiment remained poor in both stocks and crypto
FED announced speeding up of tightening monetary policy. This negative news for stock and crypto prices was anticipated and was a major reason for the last 6 weeks market sell-offs
“Triple witching” on Friday saw a massive expiry of options: that added to Friday’s weakness
Many Wall St traders booked profits on Friday and are now on holidays
The Biden administration’s “Build Back Better” initiative appears stalled in the senate and might never come to a vote so the expected fiscal stimulus might not occur
Bitcoin continued to demonstrate that it’s price behaves much like a fast growth tech stock rather than a hedge against inflation. Gold also failed to act like a hedge against inflation.
The week ahead:
Omicron lockdowns in Europe will stoke fears of economic issues and may hit the markets in the short term
Hopes for a “Santa Rally” which usually comes between Boxing Day and Jan 3rd.
Lower liquidity in the market will mean that both retail traders and Bitcoin “whales” have more control over the market. This is likely good for crypto prices overall
The market will be thinking about the monetary cliff that’s coming at the end of March. With less money in the system and small interest rate hikes coming, any perceived weakness in markets could become significant opportunities for traders to dump the price further
Many smaller stocks and crypto are looking oversold right now
Retail traders are likely to race into stocks and crypto that exhibit real strength over the next few weeks
Bitcoin - My technical analysis
Bitcoin reached $69k on November 10th and since then it has slid, so that now it’s caught in a range between $40k and $60k.
Since December 4th, when there was a major dump, Bitcoin has been ranging in a downwards channel that started at $52k and has got as low as $45k. I’ve added the “resistance” line (the upper red line) and the “support” line (the lower red line). Each time it’s hit the upper red line, it’s made a “lower high” and each time it’s reached the bottom red line it’s made a “lower low”. This defines the current short term downtrend.
If Bitcoin breaks above the upper red line and goes above the price of the most recent “lower high” (depicted on the chart with a “LH”) then this would signal a potential reversal. If it then retraces back to the upper red line and bounces up off that and rises up and goes up far enough to make a new local “higher high” then many traders will consider the trend sufficiently broken that they will look to start buying Bitcoin again.
Bitcoin chart where each candle equals 3 hours
On Saturday night, I drew in the white line manually as a projection of what the price might do and to give me an idea of the potential timing of when the price might reach the upper red line (“resistance”) and when it might get back down to the lower red line (“support”).
The line indicated that the price might get to the resistance line around about Sunday night. Here’s what it looks like now (Sunday afternoon, Melbourne time).
So far, it’s following my projection closely, but that can be a trap. When I draw projection lines on the chart, I have to remind myself this is just a made-up path and the price can actually do anything it likes.
If it continues to do something like what I’ve drawn there, then I see opportunities to buy Bitcoin nearer to the bottom and I can protect my downside by exiting that new trade if it goes below $39.5k which is the limit on this short term downtrend. If it goes below that line then it has the strong likelihood of falling further as more traders exit their Bitcoin trades. You can see I’ve added an orange line at $39.5k in the chart below.
Bitcoin chart where each candle equals 1 day
Given how much further we fell on December 4th than I expected, I’ve had to move my projection on where we’d get the next “bunny hop”. I now expect it to be later and it’s starting from a lower base. The big concern I have with this bunny hop is whether or not it will manage to make a new high above $69k. If it fails to get above $69k soon after it gets near that price, many traders will be scared that this could be a double top so I anticipate that might be the right point for some profit taking if we don’t blast past that point.
My trading strategy:
In my view, there’s reasons to be excited about the low prices on offer in crypto right now.
I am looking to purchase Bitcoin and Ethereum when Bitcoin is hitting new lows but remaining above $40k. I will be setting stop losses on my trades at just below $39.5k.
I’m also looking for signals that Bitcoin is bottoming. I’ll be using “Momentum waves” using a momentum wave indicator on Trading View as well as a number of other indicators that I’ve developed for my own trading.
The chart below is from the March 2020 drop just as an example of how I want to look for a safe entry. It shows how I would look for entries based on using TradingView with Heiken Ashi candles:
I would try to replicate that on each higher low that I could do until I got the amount of that asset that I was seeking. At each higher point my trade would be smaller than the last. Going for a larger trade can ruin your entry point so that any price downturn can rapidly leave you either stopped out or in a losing trade and so that creates unnecessary anxiety.
Each time it finds a new higher low and heads back up, I would look to move my stop loss up to just below that new higher low. In that way I will be stopped out in profit if the price has a sudden downturn, but once it’s found a bottom I can start the process over again.
One of my worst tendencies as a trader is my habit to “front run” the breakout by seeing what I think is a good price, only to see it fall further. If I do any front running it needs to be a very small portion of my intended investment so that if it keeps falling I’m in a position to enter more.
I’m trying to change my approach so that I don’t bet against the downtrend. No matter what, prices can always keep going down and so it’s our risk management that makes us profitable.
Final topic: Crypto regulation
No doubt there will be new legislation and legal actions taken to limit and/or clarify the crypto industry. The question is whether this is net-negative or net-positive. Of course it can go either way at different moments in the future, but my general view is that regulation in the US will be the most important for the industry as a whole and it is likely to be benign.
The journey to getting good laws set may be very messy over the next decade but I expect crypto to become central to a critical discussion on how democratic societies support a marketplace of ideas that allow for personal decisions and collective action.
At some point, both left and right wings of democratic politics should realise that they have their own reasons to support crypto. For the left, it’s bringing banking to the unbanked, ends the monopolies of financial middlemen that prey on the poor, and enables new vehicles for funding collective action. And on the right, it’s the free market itself ensuring private property and personal control of finances even in the face of state tyranny.
Morrison gov are promising to create pro-crypto legislation if returned in the next election. That may be an empty promise, but if Australia became one of the first countries to implement legislative support for DAOs (“Distributed Autonomous Organisations”) that could be very positive for developing a strong local crypto industry and establish a new approach to work that enables people to join organisations that they can own a piece of and have a say in the running of the organisation’s mission and parameters
US Congress has recently had very positive hearings into crypto. This will dent the effects of the Financial Services Committee that appear to want to claim crypto is just another way of banks getting rich and have suggested limiting stable coins and protecting non-accredited investors. It’s my view that any such regulations will help the traditional financial services industry and reduce consumer access to this major new asset class. This is already shown in US customers unable to receive interest on their crypto
There may be regulation coming to limit the creation and use of stable coins, but I think decentralized stable coins, Bitcoin and Ethereum are all safe from regulations that would limit their long term price growth. Other people may have less certainty but my view is based on having an office in Washington, DC a decade ago and getting to understand how the US gov and lawmaking functions
I think two things will emerge from the US Congress engagement with the crypto industry:
significant political influence is emerging that will protect Bitcoin, and
a CBDC (“Central Bank Digital Currency”) will be highly contentious and any attempt to use it to control how consumers use money will eventually become politically untenable because any digital currency that consumers want to use in a free society will have the same fungibility and privacy available today from using cash
Signing off for 2022
This newsletter was a little experiment. I expect this will be the last one for this year unless I’m getting questions that I think I may as well answer in this format. I’m not sure if I’ll continue with the newsletter in 2022, but let me know if you find it useful.
In the meantime, have a lovely, safe, and hopefully profitable Christmas and start to 2022.