Is This the Start of a New Cryptocurrency Bull Market?
Less than two weeks ago we were looking at serious distress in the markets where many were convinced we are due for at least a test of the lows of this bear market, however the situation has changed significantly. In our last analysis the price of Bitcoin has held at the 21 daily EMA (exponential moving average) support after dropping almost 10% as a result of fear connected to Tether and Bitfinex. The support turned out to be strong and if the market was giving an impression of collapsing any time after being denied at the 21 monthly EMA (which we will examine in today's blog), it is now flashing strong signals that the bear market may be over. Now, I would agree that being bullish at the 6400$ level is not very rational or wise as this is one of the most important resistance zones for BTC we will face on the way up, HOWEVER...we are now trading over the 21 monthly EMA, which to me can be a very important indicator that the new bull market may have already begun. Let us take a look why that is.
Find below a chart with monthly candles and the previously mentioned EMA from the years 2013-15 when the last bear market was unfolding. We can clearly see we have traded above the line for quite some time, before falling below and capitulating. After several months we have made an attempt to push the price over the average only to be denied and retest the lows. After that, we can see the price successfully rallied above and stayed above the 21 monthly EMA. This was a signal for a start of the new bull market in which we never dropped below the average again.
2013-2015 Bitcoin chart with each month being 1 candle, 21 monthly EMA = orange line
Now let us take a look at the current monthly candle chart of Bitcoin where we have managed to pierce through the 21 monthly EMA and are so far trading above it. In the previous month (April) we have closed below the average, however that did not stop BTC from making new yearly highs and rallying almost 1000$ higher in a timeframe of 2 weeks. I am convinced that if we manage to CLOSE this monthly candle (of May) above the EMA (which currently stands around 5350$), the probability of the bear market being over will increase highly.
2017-19 bear market with monthly candles and 21 month EMA in orange
I believe we are to an extent witnessing the phenomenon I was talking about in my last blog: People scared of holding Tether are purchasing Bitcoin, causing the price of the currency to rise rapidly. However, a scenario I had in mind was a similar move to what we have seen during the previous Tether FUD in October where the price made a move of 1000$ to the upside and retraced extremely quickly. This time, however we have seen steady growth which should be much healthier for the market and perhaps even sustainable. A clear result of fear associated with holding Tether is a premium at Tether exchanges like Bitfinex and Binance, where the price of BTC is 50-100$ higher than on other exchanges, with the highest difference being around 300$ in the last week.
Where would I expect the price to start retracing? Well, the 6400$ (exactly where we are now) should honestly provide the biggest resistance so far as the volume of trading was previously highest at this price. BUT even though the fear and greed index is extremely high, meaning people are greedy, I have been watching the sentiment of this market which is expecting a pullback and thought to myself what if BTC surprised everyone and just exploded upwards before retracing. Another factor which I took into consideration for this theory was the amount of short contracts on Bitfinex. Considering the rally we have seen continues, the number of short contracts remains very high even 2 weeks after. I believe many felt and are still feeling very comfortable shorting the market as they are not convinced 6000-6500$ will be defeated in the first attempt. This is precisely why I think it may happen and liquidate the shorts before making a retrace. Short traders will most likely put their stop losses around 6500-6700$ (the most important resistance zones would be defeated by then), which could trigger high buying pressure as closing a short position can only be achieved by buying.
Number of short contracts on Bitfinex, weekly candles
Speaking of the retrace, it will be crucial to see where and if (when it happens) BTC will bounce from. A decline in price would be very healthy at this point even in the bullish version, but we will need to pay close attention to some important levels. As previously mentioned, I will be looking for buying after the price retraces to the 21 monthly EMA. Buying at the levels we are right now should be considered extremely risky even if it turns out this rally continues and I believe we are not in the wrong by selling at least some of our position if we have managed to buy at lower prices. Another interesting idea to look into is purchasing alt coins which have been absolutely slaughtered during this Bitcoin run and are looking way more appealing. It may happen that when BTC retraces, the cash would flow into altcoins as people would be scared of holding Tether. A situation where BTC starts dropping along with altcoins may be horrific for the latter as they would most likely fall to their lows of this bear market.
A good trader must take into account all scenarios, so let us look at some of the bearish scenarios. We might be approaching a top on BTC as we are trading inside a heavy resistance zone. On the daily candle graph a clear bearish divergence between the price (which is rising) and the relative strength index indicator (which is making lower highs) is forming. This usually results in a drop of the price, however this situation is far from usual in my opinion and anything can happen. The whole rally might have been caused by people wanting to stay away from Tether and not because of increased BTC demand, which would mean the rally is unsustainable. In this case we might be due for an incredible bull trap before crashing to the lows. A strong indicator that we might be in for a savage retrace would be breaking the daily EMA. Nevertheless, as long as we stay above the 21 monthly EMA, the trend remains bullish and the bull market may be much, much closer than we think.
I wish everyone a great weekend and happy trading!
Disclaimer: This is not financial advice. Always do your own research before investing and/or trading. Cryptocurrency markets are extremely volatile and thus should be approached with caution. Make sure to limit your exposure according to your risk profile.