Ready For A Reassessment?
(Any views expressed below are the personal views of the author and should not form the basis for making investment decisions nor be construed as a recommendation or advice to engage in investment transactions.)
Summary
Technical: BTC could not hold above the monthly vwap last week and instead came back down to our $29,500 support. The support level was tested multiple times, and on Monday, BTC finally made a move up. If we again fail to hold over $31,000, we will most likely keep consolidating from $29,500 to $31,500. The ultimate target is still $35,000
Markets: Crypto markets ended up right where they started for the past week. Non-farm payroll showed above-forecasted jobs added for May, and job openings held steady. The Fed officially started quantitative tightening and, with the strong employment data, could continue hiking rates through the rest of the year
Recommendations: If prices can hold above ~$31,000, we are on track to our $35,000 target. If we get below $29,500, we could see further downside. Grid Bots that were started 2 weeks ago are in profits, and I would continue to let them arbitrage profits in this choppy market
Important News
- May 31: Fed to begin quantitative tightening letting 47.5 billion securities roll off their balance sheet per month
- Jun 1: JOLT job openings held steady at 11.4 million, slightly down from 11.8 million in the previous month
- Jun 1: The ISM Manufacturing Index for May came in at 56.1, above the forecast of 54.5 and the previous Month of 55.4 showing strong demand for manufacturing
- Former head of product at Opensea indicted with insider trading. This is the first insider trading case for an NFT
- Jun 3: The US economy added 390K payrolls in May, slightly above expectations of 325k jobs
- Jun 3: The ISM Non-Manufacturing Index for May slipped to 55.9 from 57.1 in April. Showing less demand for services in general
- Jun 3: ETP (exchange-traded products) saw inflows of ~10,000 BTC in May
Here is to another week where we closed right around where we started. This past week Bitcoin opened at ~$29,400 and closed at ~$29,800, a whopping 1.3% gain on the week. Even though we had a relatively flat week, we started Monday with a bang moving up ~10% on the day. However, buyers could not follow through as there was a slew of economic data releases and macro headwinds. On Wednesday, the Fed officially started quantitative tightening, letting the first wave of MSB and Bonds roll off their balance sheet at $17.5 billion and $30 billion per month respectively. This reduces liquidity (amount of money supply available) and could potentially drive up interest rates, causing pressure on asset prices.
We also saw primarily positive economic data released this past week. The job openings for May were above expectations, the manufacturing index was also higher than last month, and we added 390k jobs. All these data points paint a picture of a strong, expanding economy. However, as we mentioned in last week’s letter, good news could be taken as bad news because the better the economy, the more the rate hikes. Which, of course, negatively impacts crypto and equity prices. So let’s look at how we can navigate this bumpy market below.
Technical Analysis
Did we move at all? Not much has changed, and we ended up right where we started last Monday. On Wednesday, Bitcoin retraced back into the $29,500 support level as the Fed began its quantitative tightening. Good financial data = more rate hikes, which is bad for Bitcoin.
One indicator I love to look at is the anchored vwap. It is the same as a regular vwap, but we can choose what date it starts the calculations. By choosing important days, we can get a general feel of the sentiment of traders who have bought during that specific period. The light purple line represents the vwap anchored to 5/12, the day that Bitcoin prices bottomed. As seen below, this line also aligns with our $29,500 support level, which adds conviction to the importance of this level.
Another indicator is the 9 EMA on the 4-hour time frame. I like to use the 9 EMA as a momentum indicator. When prices break out of consolidation, I want to see prices ride the 9 EMA. If prices start flattening out and break under the 9 EMA, it shows me that buyers are losing steam.
Below we can see ADA has been outperforming other top cryptocurrencies in the past week. ADA is up ~18%, BTC is up ~3.8%, ETH ended up just below even, and SOL is down ~7.5%.
Fundamental Analysis
We have not seen the fear and greed index maintain such a high fear reading for a whole month. Usually, in cases where we have extended periods of fear, it results in spikes of hope, which translate to short-term rallies. Could we see one of these sharp rallies soon?
Futures open interest (OI) shown in the number of BTC has hit an all-time high this Monday. From our research, higher OI of BTC futures tends to lead to an explosive move in either direction. Currently, we have ~525,000 BTC worth of futures contracts open, an all-time high in volume.
For the whole month of May, we saw a high amount of Bitcoin being sold by miners. This marks a distinct change in behavior, as during the first pullback in December – January, we saw an accumulation by miners. If prices decline further toward the realized price of $23,600, we could see miners capitulate, marking the bottom in this current bear market.
Recommendation
Swing Trading (Manual) | hands-on approach
Bitcoin failed to hold the breakout level last week and retraced right to ~$29,500, where we had our stop. I always have a mental stop because prices usually break key levels and then reclaim them. This is because price support levels ultimately always tend to overshoot these key levels as a way to liquidate stop orders. Nothing has changed about this trade. Bitcoin moved up and reclaimed the $31,000 level on average volume. We are still looking for $34,000 – $35,000 as the ultimate target, and if we can’t hold above $29,500, our idea is invalidated.
Risk-averse (Grid Bot) | 1 – 12 month
The open Grid Bot has been making arbitraging profits as prices chop sideways. As seen below by the sample bot, we are up 2% in Grid trading profits and another 1.8% in unrealized profit. We would not suggest opening Grid Bots on the way up, as our general view is still there might be a second leg down. If Bitcoin moves lower towards $25,000 support, we recommend adding another Grid Bot with 10% – 25% of spare cash. I would use a lower bound of ~$20,000 and an upper bound of ~$37,000, with 40 – 50 grids.
Hodler (Moon Bot) | 1 – 3 year time frame
For those with Moon Bot already open, we suggest holding. We have the same recommendation as last week for others without a position. If you believe in Bitcoin for the long run, you can open up moon bots with 10% – 20% of your capital. If Bitcoin drops to ~$25,000, you can create another bot with your free capital, thus bringing down your average cost.
Bitcoin Volatility
Bitcoin’s daily volatility in the past 30 days is 4.19%. Its approximate average daily range going back 60 days is $1,805.
Our View
Ready For A Reassessment?
Last week we stated that it’s time to take a breather because the worst time has passed, and the most hawkish expectations for the Fed’s rate hikes are starting to ease. However, it doesn’t mean a bull market is just around the corner, and we are still in the midst of a super tightening cycle in 2022-2023. In a word, the pace of interest rate hikes is still fast, and we could see a marginal fade in rate hikes as time goes on.
Source: CME Fed WatchTool
Because of its data-dependent nature for the Federal Reserve, the exact timeline for rate hikes of this tightening cycle (i.e.2022-2023) is still unpredictable, let alone the balance sheet roll-off is expected to continue for several years. The impact of rate hikes on risk assets mainly depends on market expectations. There are over 90% probabilities for 50 basis point rate hikes in June and July, and the odds are above 60% for a 50 basis points rate hike in September.
In terms of Quantitative Tightening (QT), which has just begun in June, we’ll see the amount of balance sheet roll-off increase gradually in the first six months, while the impact on liquidity will not kick in until year-end. We have never seen QT at these types of levels before, and no one knows the effects it will have on the market.
Remember one thing; price is the ultimate reflection of the market participants. It doesn’t matter what the news is. If the price moves in the opposite direction of your expectations, you are wrong. Price is always right.
We don’t expect an obvious bull trend for cryptocurrencies in Q2, 2022. However, small rebounds are common during bear markets. We don’t rule out the possibilities of marginal changes in the Fed’s rhetoric and good news from both fundamentals and government policies. We believe it’s still not a time to panic but a time for further reassessments.
Market Sentiment Analysis
Traders are always interested in valuable indicators that can measure market sentiment. One of the market forces that has become increasingly popular is option market makers’ gamma exposure (GEX). Gamma shows the rate of change for Delta, which is what market makers use to hedge their positions. So, the higher the Gamma, the more market makers will need to hedge when prices spike in the respective direction. If you remember the Game Stop ($GME) debacle, that was caused by a Gamma squeeze.
Source: Laevitas
We predicted that a negative spiral could emerge in early May if GEX is deep below the neutral line and Bitcoin trades under $30,000. This means that volatility will keep hovering due to the effect of negative Gamma. Outsized negative Gamma could lead to a gamma squeeze, causing further declines until GEX data moves above its -15k threshold.
With GEX finally above water and starting to show an improved situation since late May. We believe a much healthier future is now in preparation from a market sentiment perspective.
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