Issue #15 | Altcoin Capitulation in August?
Key Bitcoin invalidation levels, a dangerous sign in dominance, US credit rating downgrade, and much more.
Issue #15 of CoinChartist (VIP) overview
A series of technical indicators supporting Bitcoin price + key invalidation levels
Why August could bring final capitulation or reversal to altcoins
A comparison between early BTC and alts
A detailed macro report featuring non-farm payrolls, unemployment data, the recent Fitch credit rating, and more
What happens to Bitcoin when stocks make new ATHs?
An educational lesson on the Evening Star Japanese candlestick pattern
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We are now fifteen issues into this newsletter, and Bitcoin has predominantly traded between $31,000 and $24,000 during this time, with the majority of the price action occurring above $28,000. This is going on almost four months of sideways, which is uncharacteristic for Bitcoin. Something has to change soon.
For now, there is significant technical confluence highlighting why Bitcoin his finding support at this current level. As long as the current level holds on a closing basis on the 1W, a bullish trend is still active. These levels also help provide a point of possible invalidation, or enough to warrant considering a structural change in the short-term trend.
The most important of all technical tools in my toolbox currently is the 1W Bollinger Bands. According to Bollinger Band Width (not pictured), the Bands are tighter than at any other point in 1W BTCUSD history. The Bands have yet to start expanding to signal a return to a trending state, but they will eventually. As long as BTCUSD remains above the 1W Bollinger Band basis, a large move to the upside is the higher probability expectation, as we’ll demonstrate at the end of this series of Bitcoin charts.
Learn more about the Bollinger Bands here.
The 1W BTCUSD Ichimoku opened last week inside the cloud (not pictured). With the cloud turned off for greater clarity of the Tenkan-sen and Kijun-sen, we can see that price is above and being supported by the Tenkan-sen (blue). Furthermore, the Tenkan-sen is crossed above the Kijun-sen (maroon), which suggests the market is bullish. Note that the black arrows representing the location of the Bollinger Band basis from the previous chart, are precisely where the Tenkan-sen is. This is what the technical analyst refers to as confluence.
Learn more about the Ichimoku here.
The Donchian Channels are also providing support and moving upward. The Donchian Channels are a breakout system similar to the Bollinger Bands, yet uses a unique formula in its calculation. Both tools rely on moving averages, and therefore are trend-following tools. According to John R. Hill and George Pruitt of Futures Truth Magazine, who test trading systems for a profession, claim that trend-following systems, and more specifically breakout systems have the “best characteristics,” even beating out a moving average crossover system. If Bitcoin trades above $32,165, a breakout signal will be generated.
Learn more about the Donchian Channels here.
Additional confluence in support appears thanks to the Williams Alligator, which has its “mouth” wide open and is “eating.” This only happens when an asset is trending. The tool’s “lips” are kissing the bottom side of Bitcoin price action, acting as support. The lips are a 5-period SMMA that is smoothed by 3 periods. The Alligator’s “teeth” are an 8-period SMMA that is smoothed by 5 periods. Finally, the “jaw” is a 13-period SMMA that is smoothed by 8 periods. All of these numbers are Fibonacci numbers, where each SMMA is smoothed by the previous number in the sequence.
Learn more about the Williams Alligator here.
In the last chart of this section, we can see the results of a trend-following breakout system in action. After 1W BTCUSD dropped to a historic low in terms of tightness (now surpassed by current price action), it exploded upward and gave a buy signal by breaking out above the upper Bollinger Band. The buy signal is invalidated with a significant close below the Bollinger Band basis. Although there was brutal wait before the breakout, those who were patient reaped the rewards of a nearly two-year-long bull run and 4,000% upside. This is why the Bollinger Band basis must hold. But take note of the first arrow on the chart. There were several pushes below the basis before ultimately moving up. Such a scenario isn’t just possible, it is likely as volatility begins to return.
All this week I’ve been building a library of quotes, and this stood out to me as a good message to make regarding the current situation in the crypto market, especially around Bitcoin. With price barely moving, remember that patience is necessary and it is often the waiting that makes us money – not buying or selling. This is why investing greats all advocate long-term goals and having a plan in advance in case things go wrong.
The allure of altcoins and their incredible returns when crypto is bullish keeps investors buying these high beta assets. This comes with higher levels of risk and volatility. Altcoins appear to be possibly be ready for final capitulation, and Bitcoin Dominance could support this idea. Most importantly, signs point to this happening in August.
The first notable technical indicator that suggests a change in the altcoin market’s trajectory is a TD9 sell setup in Bitcoin Dominance on the 1M TD Sequential. Designed by market timing wizard Thomas Demark, the TD Sequential helps time reversals after a certain sequence is triggered. These “setups” can fail, which is why they aren’t considered signals. The TD8 & 9 are both important to the sequence and can pinpoint a trend change. Also of note, the TD8 & 9 are appearing as price meets resistance established six years prior with a “perfected” TD 8 & 9 buy setup. This suggests a seriously strong point of resistance. “Perfected” setups only are confirmed with a higher high or higher low, depending on the direction of the sequence. This leaves room for one more high in BTC.D during August, before a larger reversal between the relationship in Bitcoin and altcoins.
The area of resistance is made abundantly clear by the 1M SuperTrend. This dynamic resistance level has never been broken, despite several attempts to move above it. Bitcoin Dominance has wicked into the resistance level a number of times, but as we’ve pointed out repeatedly during this issue, it is a closing basis that matters.
Learn more about the SuperTrend here.
Momentum in BTC.D continues to weaken, according to the 1M LMACD. The lighter green ticks on the histogram are shrinking showing the trend losing strength, while the distance between the LMACD line and signal line shows that the chart is overbought. The histogram turning red and the LMACD line crossing the signal line down from above will trigger a sell signal, suggesting it’s time to move from BTC into alts. The LMACD is a lagging indicator, however, so alts will already be recovering by the time that crossover arrives.
Learn more about the MACD here. (Note: LMACD is the logarithmic version)
The comparison above shows the total altcoin market versus Bitcoin circa 2013 through 2015. After a peak in November, altcoins bottomed 59 bars later in December. Compare this to Bitcoin’s November 2013 peak and January 2015 bottom, and the timeline matches perfectly. Although the price action in between is different, altcoins could be heading for a double-bottom type situation during August. This happened 32 weekly bars later in BTCUSD, which would line up flawlessly with the first or second week of August.
Learn more about the Double Bottom here.
Last but not least, we have a zoomed out look at the cyclical behavior in ETHBTC. If the path of corrective behavior continues to form with cyclical accuracy, a bottom should be put in between Ethereum and Bitcoin in the coming two months. Bitcoin outperforming Ether can happen for two reasons: Bitcoin rising while altcoins remain relatively stable, or altcoins crashing harder than Bitcoin. We’ve seen plenty of both all this year, and it might not be over yet. But when it is over, it will be time to favor altcoins again.
Learn more about Hurst Cycle Theory here.
What’s going on in the macro world has chief importance in crypto. With very little interest in the nascent sector itself, tailwinds from the stock market and a falling dollar are vital to a broader crypto market recovery.
The week started off with negative news for the US. Fitch, one of the big three credit rating agencies alongside Standard & Poor and Moody’s, lowered the US’s credit rating from AAA to AA+. While this seems negligible, when Standard & Poor lowered the US credit rating in August 2011, the stock market fall 17% sharply. If the market can withstand this news, it will be viewed as extremely bullish and could push the S&P 500 to a new all-time high.
If the S&P 500 takes out its previous all-time high in the coming weeks, that should be plenty to finally allow Bitcoin to catch up as profits roll into other risk assets. Following the COVID crash, it wasn’t until the stock market made new all-time highs that Bitcoin really began to participate in the rally. This might be necessary again to instill confidence in the crypto market.
Non-farm payrolls helped the stock market shake off the credit rating news. Non-farm payrolls can be used to gauge the strength of the economy. If the key measure of job growth is rising, then a recession is unlikely as companies are hiring. Take note in particular how each time NFPs turned downward, a recession hit. Currently, this metric continues to rise suggesting the economy is strong. Unemployment levels also remain histroically low, although such low levels typically precede a recession.
A recession looks rather unlikely at the moment when looking at the underlying stock market trend strength. Tech stocks lead recoveries in the economic and business cycle, which explains why the Nasdaq has been the leader among top US indexes. In fact, the Average Directional Index is showing an underlying trend that is stronger now than at any point during 2020 and 2021. However, this could be viewed cautiously as some kind of divergence, until new highs are made in price and not just the indicator.
Strong non-farm payrolls combined with more news from BRICS caused the Dollar Currency Index to potentially end its short term rally, with the appearance of an Evening Star pattern. The Dollar Currency Index is a weighted basket of world currencies like the Yen, Euro, and Pound trading against the US Dollar and is a key measure of its strength or weakness. We’ll dig into why this potential reversal signal is important and supported by technical confluence in the educational section below.
But before we move on, let’s take a look at the events occurring next week that might have an influence on financial markets. On Tuesday, Philadelphia Fed President Patrick Harker and Richmond President Thomas Barkin will speak. Depending on the dovish or hawkish tone they take, markets could react. Thursday, CPI data is released along with Initial Jobless Claims. Friday, PPI closes out a big week. If we get a dovish Fed along with further cooling inflation measures, markets could surprise to the upside. If we get a hawkish tone and inflation comes in hot, thinks could turn downward quickly due to the proximity of the Fitch rating.
This week’s Chart Class features the Evening Star pattern – a bearish Japanese candlestick reversal pattern.
The Evening Star pattern consists of a large white upward candle, a doji, and a large black bearish candle that engulfs most, or all of the first white candle. The pattern shows that buyers are in control, but meet resistance and indecision, and then are ultimately overwhelmed by sellers in the third session.
The Evening Star pattern appeared on the daily chart, but we can see how price action in the 12H and 4H price charts above created the pattern on the 1D timeframe.
The pattern is most effective at the top of an uptrend, combined with other technical signals, such as a breakdown of a trend line and additional confluence.
Additional confluence can come from dynamic resistance levels such as moving average. Here, the Evening Star pattern combined with a possible rejection of the 50-day moving average, gives the chances of a reversal a higher probability.
Further confluence is found in a possible bearish divergence in the Relative Strength Index. A divergence occurs when price makes a lower high, but a momentum indicator makes a higher high.
All of these signals combined make further downside in the DXY over the next several days all the more likely. With the DXY representing strength in the US dollar, and BTC trading against USD on the most dominant trading pairs, weakness in the DXY could translate to upside in Bitcoin after such a lengthy phase of sideways.
Until next week, thanks for reading!
-Tony
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