Rejoice Ethereum and cryptocurrency fans. Add in equity bulls too. From a technical analysis perspective, these markets are displaying reversal setups. Ethereum is more advanced, triggering its confirmation over the weekend.
First off, why did I say that stock market (equity) traders should also be excited? My regular readers and I have already established that cryptocurrencies act as RISK ON assets. Meaning that currently, they follow, and move in tandem, with the stock markets. When the stock markets are moving higher, the cryptocurrencies are as well. This displays a move back into risk on (riskier) assets. The price action in bonds and the US Dollar also tell us whether we are in a risk on or risk off environment. When stocks and cryptos are moving up, bonds and the US Dollar are selling off.
As I am writing this article, the US markets have just opened for the week and we indeed do see the US Dollar and bonds dropping. At least for now. Things could change later this week but this is where technical levels come in to give us levels which invalidate the trade set up.
Now back to Ethereum fans rejoicing.
The major cryptocurrencies (and stock markets!) are displaying signs of ranging. In layman’s terms, instead of continuing to sell off hard, a rectangle like range pattern has been established. Prices just bounce from one level at the bottom (support) and reject one level at the top (resistance) that a rectangle is formed. If we dig deeper for meaning, a range tells us that the selling pressure has exhausted. We are in a situation where there aren’t more sellers but an even amount of sellers and buyers now keeping this range intact. Once we break out, we can confirm the bulls/buyers are taking charge.
After a long downtrend, the reversal trader in me keeps tabs on any charts that show signs of a range because it tells me the downtrend could possibly be over. Again, I say possibly because a trigger must be confirmed. Just because we have a range does NOT mean a reversal is about to occur. Prices can break below the support level of the range and the downtrend continues. This would mean that the sellers return, and all the range turned out to be was a pause in the current downtrend.
You can probably guess that the reason I am excited is because Ethereum has confirmed a breakout trigger. No, not to the downside below support, but a breakout above resistance indicating that a reversal has triggered.
Cryptocurrency markets are open over the weekend which is when Ethereum triggered the breakout:
Ethereum began to range at the psychologically important $1000 zone. If we broke below $1000, then we really would be considering $500 and lower Ethereum! But the range held and as you can see from my simple chart above, We confirmed a major breakout over the weekend. This is definitely bullish.
From a swing trading perspective, the trade is simple. As long as Ethereum remains above $1200, our first target to the upside comes in at $1800. Price can pullback to retest $1200 before then. What is important is that buyers step in to keep prices above $1200. If not, then we have what is known as a “fake out” or a “false breakout”. That would be extremely bearish and we would have to once again open the conversation about $500 Ethereum.
To show you the significance of this move in Ethereum, let’s go to the weekly timeframe:
Note that on the week of June 13th 2022, Ethereum actually closed below a MAJOR weekly support level. This area acted as resistance back in January 2018 and support in February 2021. Once we broke below, Ethereum remained below it for the next month. I bet bulls were on edge because a drop further was really possible.
As we begin this week, Ethereum is recovering and finally reclaiming this weekly support level. This is promising but it doesn’t confirm anything just yet. A weekly timeframe means we need a weekly candle close. So if Ethereum closes above this major zone by the end of Friday, then my friends, we have a really bullish sign.
The same ranges can be found on Bitcoin and US equity markets such as the S&P 500 and the Nasdaq. Unlike Ethereum, they have not confirmed their breakout. This means one of two things. Either Ethereum is leading and the rest will follow. Or, the rest reject and continue their range which likely leads to Ethereum dropping back and ultimately confirming a false breakout.
On the news front I don’t see any major news for Ethereum suggesting why the crypto is up almost 50% in 6 days. Okay sure there is news about Ethereum 2.0 being confirmed, but this is a story we have heard many times. I won’t believe it until I see it. Too many times has Ethereum 2.0 been confirmed and then delayed.
What many people are attributing this rally to is Ethereum’s ninth shadow fork. This is the final testing step towards the migration to a proof-of-stake (PoS) network. In simple terms, this will make Ethereum gas fees cheaper…which they really need to be if Ethereum wants to be the money for the internet.
It was designed to test the updates that were made in the recent Sepolia hard fork, which took place on July 6th. It will also focus on a maximal extractable value (MEV) boost feature. This one refers to the maximum value that can essentially be extracted from block production in excess of the standard gas fees and the block reward.
Some might still scoff at the idea of buying Ethereum and other cryptocurrencies as they have gotten hammered with the stock market sell off. From a long term investment perspective, I understand why people hate the idea of holding (hodling) cryptocurrencies. However from a risk on perspective, we must acknowledge they do act as a risky asset just like stocks. People will still trade cryptocurrencies, and maybe in the future they become their own asset class called ‘digital assets’.
I don’t want to speculate that far ahead, but my long time readers know that once regulations come in, it will be bullish for cryptocurrencies. Albeit destroying the original purpose of Bitcoin as being an asset far away from big government, big banks and big corporations. The hardcore Bitcoin and cryptocurrency traders/investors might look elsewhere (DeFi), but for traders, regulations mean more liquidity as bigger funds enter the market.
Ending off with epic crypto funds blowing up, the apt comparison is the Dot Com Bubble. Yes, we are seeing highly leveraged funds blowing up. This is almost a cleansing and weak hands are being shaken out hard. Once this cleansing is complete, the crypto market will still be there and will likely attract the money of speculators, traders and investors alike.
From a technical analysis perspective, all the criteria for a reversal is met on Ethereum, and are close to being met on stocks and Bitcoin. Everything moves in waves, and signs are promising that this downtrend in stocks and cryptos is coming to an end.