Retracing to Key Levels
(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.)
Technical: BTC broke through its $22,000 resistance and briefly touched $24,000 before immediately being sold off. BTC made lower highs and slowly grinded down back towards $22,000. On the other hand, ETH consolidated sideways during the whole week and is still inside its tight range. Both BTC and ETH have retraced to the 9-day EMA offering short-term support. We can see BTC retrace to $20,000, and ETH will likely retrace to its breakout level of $1,250.
Markets: The yield curve continues to be inverted and consolidated sideways this past week. We are currently pricing a 72% chance of a 0.75% rate hike instead. Markets should be relatively quiet before the Fed meeting on July 27th.
Recommendations: ETH reached a high of $1,664 last week but did not hit our target of $1,700. However, that still translates to 66% in profits for the ETH trade. Our BTC grid bot is up to 5.1% in grid profits, and our moon bot is up to 7.65% in grid profits. We recommend opening a grid bot near BTC’s $20,000 – $21,000 levels. We recommend opening a grid bot near $1,250 for ETH. The exact parameters will be given below.
Important News
- Jul 18: UK inflation rises to a 40-year high of 9.4% in June;
- Jul 21: The European Central Bank increased interest rates for the first time in 11 years, pushing its benchmark rate up by 50 basis points and bringing its deposit rate to zero
- July 21: Italy Prime Minister Mario Draghi resigns, sending Italian bonds and stocks into a selloff
- Jul 21: Philadelphia Fed Manufacturing Index drops to -12.3 in July vs. 0 expected;
- Jul 22: The U.S. services PMI fell to a 26-month low of 47 in July from 51.6 in the prior month;
- Jul 22: The U.S. manufacturing PMI slid to 52.3, the weakest level in two years;
- Jul 22: The flash PMI composite output index fell to 47.5 in July, marking the sharpest contraction since the beginning of covid-19.
Summary
Crypto had its strongest week in this current year, and equities had a powerful bounce as well. With the release of an overestimated CPI number last week, it was hard to predict that the markets would have such a strong week. One signal that the market was not reacting to the CPI numbers as we had imagined is the strong show of buyers on the second day, followed by a gap up to the upside. This demonstrates a bid (buying pressure) in the markets, and since the price is the embodiment of all news, we position ourselves in alignment with the price. We started the week with a lower open on Bitcoin and Nasdaq, down 4.2% and 0.75%, respectively. We might have been slightly overextended last week, and investors are now leaning more on the cautious side. This week we have 175 companies in the S&P500 reporting earnings making up 50% of the entire market cap. Earnings releases and the FOMC meeting on Wednesday this week are both market-moving events. With that, expect a relatively volatile week as these new data points are released and digested by the market.
July and August have historically been positive for equities, and we wouldn’t be surprised if this trend continues. If positive comments are made at the FOMC meeting or earnings are above estimates, we could see a pullback and continued uptrend move before turning negative in September, a historical negative month. We believe this scenario because while there are still plenty of macro risks, a lot has been priced in and many companies have lowered earnings estimates. So if we see any positive comments or beats on estimates, we could continue upwards.
Recommendation
Swing Trading (Manual) | hands-on approach
We have two dip buying trade ideas for swing trades this week. With the Fed meeting on Wednesday, we could see potential selling leading up to it or a quick downwards reaction after the news. I do not know if prices will continue lower due to the release, but we are trading based on key levels on BTC and ETH with good risk-reward.
For BTC, we recommend buying near $20,000, this has acted as a bull/bear dominance level, and I believe it will provide strong support. I recommend stopping out if prices fall under $19,000. We see $22,000 as an initial resistance level, but our ultimate target is $24,000. This trade has an R/R ratio of 3:1.
BTC/USD
For ETH, we recommend buying near $1,250. This key level acted as resistance 3 times in the previous month. If we fail to hold this level, we are back inside the previous trading range and will likely revisit the lower bound of $1,000. We recommend stopping out under $1,170. Our first target is $1,500, and our main target is $1,700, the recent highs. This trade has an R/R ratio of 4:1 – 7:1.
ETH/USD
Risk-averse (Grid Bot) | 1 – 12 month
I recommend opening a Grid Bot with 10% of portfolio size when BTC comes around the $20,000 support level. I would set a lower range of $15,000 and an upper range of $32,000 with 80 grids. This would result in a grid profit of around 0.7% – 1.5%. For ETH, I would recommend opening a Grid Bot at $1,250. I would set a lower range of $800 and an upper range of $1,900 with 80 grids.
Our opened Grid Bot continues to arbitrage profits bringing our locked-in profit from 4.1% to 5.1%.
Hodler (Moon Bot) | 1 – 3 year time frame
Our sample Moon Bot is locked in 2.6% profits this past week with 18% in unrealized gains. For long-term hodlers you can take the same recommendations as the Grid Bots but instead of setting your own levels, open a BTC/ETH moon bot instead.
Technical Analysis
Bitcoin
Bitcoin was rejected at the $24,000 whole level. This level was not highly transacted in the past but seeing this was a bear-market rally, bulls probably wanted to lock in profits and sold BTC at the first sign of resistance. Prices on the hourly chart formed a Doji candle right at $24,000. This represented a reversal point. The reversal was confirmed when BTC made a lower high at $23,600. From that point, its nearest support was the $22,000 breakout level. At first, we got support from the $22,000 level, but as prices made another lower high, we got increased selling volume on the breakdown, which signals conviction from the sellers.
As mentioned in the trade ideas above, BTC has fallen back into its trading range. We do not see strong support until the $20,000 – $20,500 zone. So following the path of least resistance, we see prices going to that key area before determining the next move. If we can find support and break over $24,000, we can see the same thing happen but to the upside. Looking at the volume profile below, we can see that between $24,000 and $28,000, there is a lack of volume, most likely due to forced selling. So if we can break into this zone with strong volume, we can quickly reach $28,000.
Bitcoin has spent the longest time under its 200-week moving average in the history of its existence.
Ethereum
ETH went sideways in a tight $170 range after making an 18% gain last Monday. We started the weak negative, and today we have given back the whole 18% move. ETH hit a high around $1,640 and tested that level 3 times before turning bearish. Usually, for equities and crypto, the third test of a level represents the decisive moment. If prices break over the level, it is likely a true breakout, but if it is rejected, we will move lower. We look at the 50 and 100 hourly moving average as a signal of a turning trend. When the 50 hourly MA is above the 100 MA, it is a sign that the trend is bullish. However, when the 50 MA crosses under the 100 MA, especially after a triple top, that is a clear signal of a bearish reversal. As seen, ETH continues to fall 11% after the downwards cross.
ETH will most likely retrace to $1,250 as there is a lack of volume between $1,500 and $1,250. The 50-day moving average coincidentally aligns with that level as well.
Fundamental Analysis
We can see short-term holder’s(STH) cost basis at approximately $28,000 for BTC. Looking back at 2018 and 2019, the STH’s cost basis has proved to be a strong gravity level for BTC as prices have tested it multiple times before moving further to the downside. This has historically been an area of resistance as STH’s starting to sell their positions as prices return to their entry price.
Looking at correlations, BTC’s positive correlation to the M2 money supply highlights its use as a hedge against the expanding money supply and inflation.
BTC’S correlation to the Nasdaq remains high at around 0.5. However, we see a temporary decrease in correlation in the recent action as BTC has lagged while the Nasdaq made a stronger move. It is nice to see a decoupling between equities and crypto lets follow this trend in the future weeks.
A Textbook Gamma Squeeze Just Happened
ETH just experienced a GameStop(GME)-like gamma squeeze. As price surges, market makers’ short call positions will be in the money, resulting in heavy unrealized losses and forcing market makers to buy more ETH to hedge their negative delta exposure caused by gamma. Therefore, as ETH goes up, market makers have no choice but to buy ETH, which contributes to the strong upwards move, causing a squeeze.
Data shows many short-term ETH out-of-the-money call options that expired in the current week and the following week have been accumulating following news around the ETH merge. This move pushed ETH call option open interest(OI) to the highest on record.
Now ETH gamma exposure index(GEX) is around the highest on record. What’s more, we’ve found ETH’s GEX shows pretty much the same pattern as ETH’s price after 19 Jun. This phenomenon further proves that market makers’ hedging activities drive ETH’s price action.
ETH is currently rallying for the bullish sentiment on the merge. If the positive sentiment can persist and liquidity can restore itself to the normal level, we can definitely see a healthy uptrend for ETH. However, suppose the ongoing sentiment isn’t strong enough to attract more outside money or doesn’t exist long enough to improve market liquidity. In that case, it might follow the ‘easy come, easy go’ pattern as invariably traders close out their option positions, and GEX starts to plummet.
Our Unique View: What Does a Falling Euro Mean for Cryptocurrencies?
A Falling Euro
Economic activity in the eurozone unexpectedly contracted for the first time since early 2021, suggesting a recession could be on the horizon. The latest reading of the Markit composite PMI in July fell to 49.4 in July, a contraction territory number and a 17-month low from 52.0 in June. In contrast, the Eurozone’s Markit Manufacturing PMI in July was 49.6, down from the previous print of 52.1.
Eurozone business activity unexpectedly contracted in July.
Till now, the main economies in Europe UK, Germany, France, and Italy, all show signs of recession in different degrees. The significant drop indicates that Eurozone economic activity is cooling at an eye-popping rate. Even more frightening is that the Eurozone July flat consumer confidence has plummeted to the lowest level since 2009.
Eurozone July flast consumer confidence shows the lowest level since 2009
On top of that, the exodus of foreign capital out of Europe is speeding up due to surging inflation and waning expectations from investors. The euro EUR/USD even dropped after the European Central Bank hiked its benchmark interest rate for the first time in 11 years by an astonishing 50 bps, signaling a disappointing outlook on Eurozone fundamentals by most traders. This move will drag Europe into a deeper recession.
What Does It Mean for the US and Cryptocurrencies?
The falling European economy and Euro will undoubtedly trigger more significant impacts on both the global and US economies. For example, sluggish demand from Europe will worsen the performance of US global corporations and further deteriorate US economic numbers. The negative effect can be shown from the latest US flash PMI composite output index: the number fell to 47.5 in July, which is the sharpest decline since early 2020. The S&P Global said, “manufacturing has stalled, and the service sector’s rebound from the pandemic has gone into reverse, as the tailwind of pent-up demand has been overcome by the rising living cost, higher interest rates, and gloomy outlook on the economy.”
Frankly speaking, both the ECB rate hikes and Eurozone economic downturn present uglier outlooks for cryptocurrencies from a macro and capital liquidity perspective. Like the US, the European financing cost is becoming more expensive due to its central bank’s rate hike initiative, and the price valuation of risk assets will undoubtedly reflect this tightening cycle. Moreover, due to higher capital costs, less active buying power during European trading hours will also pressure crypto prices.