BTC: Bounces Face Formidable ResistancePrimary Chart: Daily Logarithmic Chart Showing Anchored VWAPs, 34-Day EMA, Trendline
Previously, SquishTrade discussed why BTC's downtrend cannot reverse given that sellers remain in control as defined by the volume-weighted average price starting at the all-time high. That discussion is contained in the post linked below.
Supplementary Chart A
Some may respond that any downtrend cannot reverse if sellers remain in control, so why state the obvious? Trends end via a process. A downtrend requires a bottoming process and an uptrend requires a topping process. So for a downtrend to reverse, it remains important to see buyers starting to take control on different time frames. For example, in a downtrend, buyers may often take control temporarily on smaller degrees of trend during a bear rally—such as the bear rally in BTC from June to mid-August 2022—only to realize that sellers remain firmly in control on a larger degree of trend (such as the primary trend). When sellers remain in control on larger degrees of trend, then buyers will inevitably lose control eventually on the lesser time frames when bear rallies end.
The Primary Chart shows how BTC's price remains well under the VWAP representing the primary trend (red) anchored to the all-time high, as well as the down trendline covering the same period. But other VWAPs are also looming overhead and sloping downward including the VWAPs anchored to the March 28 swing high (gold), the June 18 low (black), and the September 21 low (green).
BTC has chopped within a tight trading range since mid-September 2022. This appears to be consolidation, a typical occurrence after powerful and sharp trend moves. Markets and instruments that have trended strongly in a given direction need time to digest that move. Chop occurs, trapping both sides of the market, frustrating bears and bulls alike with persistent moves in both directions that quickly fail and reverse. Over the summer since the June 2022 lows, BTC has chopped and consolidated as shown in the chart below dated from early October 2022. Notice the abundance of failed breakouts and breakdowns around that key $19,246 level.
Supplementary Chart B
Note that this choppy consolidation range has continued despite equity indices falling precipitously in September and October 2022 to new YTD lows. After tracking (or correlating) to some extent with major equity indices like the Nasdaq 100 this year, BTC's price has remained relatively sideways while indices have continued to fall into mid-October. Now that equity indices are rallying, BTC still remains stuck in the same range, though this could change at any time. Below is a chart of BTC's trading range as of October 21, 2022—notice how BTC has chopped very tightly for around the .786 retracement of its summer rally. This chop has lasted since mid-September 2022.
Supplementary Chart C
Taking a somewhat broader perspective, the chop has lasted since June 18, 2022, lows. The Primary Chart shows the major five-month support and resistance levels as blue rectangles. Price has been unable to leave this zone since the YTD lows. The downtrend line on a logarithmic chart has held as resistance since the all-time high November 10, 2021. Even the shorter-term downward trendline from May 2022 has been unbroken as resistance. On larger time frames, therefore, the picture remains quite negative for BTC. And even on lesser time frames, BTC's price has remained relatively week, unable to stay above the VWAPs from the June and September 2022 lows.
One need not look only at the technical evidence from BTC's chart to find obstacles to a major trend reversal in the near future. Additional hurdles stand in the way of BTC reversing its trend in the near future (though bear rallies are not precluded), which include the following:
1. A meteoric rise in interest rates this year that is unlikely to stop pressuring risk assets any time soon. SquishTrade will reference the 10-year yield from the US as a reference for rates in general, but many interest rate charts in other countries look similar. The sharp upward trendline in rates (TNX charts below) from early August 2022 to present date explains in part the selling pressure seen broadly in equity indices around the world. This upward trendline has not been broken to the downside yet.
Supplementary Chart D.1
Even if interest rates need time to consolidate and pullback to digest this massive move, the larger term picture suggests the trend may be upward for the longer term. Consider the chart below, published with apologies for the unpleasant appearance and implications. It shows a very long-term breakout in yields above a 40-year downtrend. This appears significant. Though a retest of the trendline could occur, the longer-term implications are that rates will be higher for longer, a refrain repeated by the central bank in the US and elsewhere in recent months.
Supplementary Chart D.2
The next chart shows that a corrective pullback in yields could occur in the near term based on momentum divergences and relative weakening despite higher highs in the rate. The %B indicator shows that price is piercing the upper band (set at two standard deviations from the mean) less deeply, showing that higher highs in price are actually relatively weaker and lower highs from a standard-deviation viewpoint.
Supplementary Chart D.3
Finally, given the strength in momentum on a monthly basis, yields are very likely to continue to remain strong in the coming months even if a corrective pullback occurs. Momentum hit a 40-year high on RSI (monthly chart below):
Supplementary Chart D.4
2. Inversion of the yield curve, which has some predictive power in forecasting times of slowing economic growth and even recessionary periods. The chart below shows the spread between the 2-year and the 10-year yield, which remains below zero, indicating that the 2-year has remained persistently above the 10-year, despite its significantly shorter duration. This presents a departure from the normal relationship between these two yields, and in bond-market parlance, is called an inversion. This inversion has persisted for about 4 months since July 5, 2022, though there was also a brief inversion in April 2022.
Supplementary Chart E
The yield curve will tend to tell the market when the central banks may be ready to pivot. The central banks will not pivot because market participants think the pivot is nigh when markets are severely oversold. As of October 2022, the yield curve has remained inverted for quite some time. The inversion has deepened during the summer months, but now the inversion is simply persisting with the spread percentage chopping up and down and ultimately moving sideways on the chart shown above.
3. Crypto market cap just broke below a long-term trendline. While trendlines can be messy and require adjustment, a break of a longer-term trendline like this does not bode well for crypto in general. Perhaps this is just a whipsaw break, and time will tell. And perhaps BTC will be the relative winner, as some have argued, despite crypto overall continuing to decline. SquishTrade will not make such a prediction but remain a follower of what the charts are saying. When BTC's charts begin showing structural change and a primary trend reversal, and rates begin declining at the larger degrees of trend, the conversation can certainly shift to a more positive one for this asset.
Supplementary Chart F
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Author's Comment: Thank you for reviewing this post and considering its charts and analysis. The author welcomes comments, discussion and debate (respectfully presented) in the comment section. Shared charts are especially helpful to support any opposing or alternative view. This article is intended to present an unbiased, technical view of the security or tradable risk asset discussed.
Please note further that this technical-analysis viewpoint is short-term in nature. This is not a trade recommendation but a technical-analysis overview and commentary with levels to watch for the near term. This technical-analysis viewpoint could change at a moment's notice should price move beyond a level of invalidation. Further, proper risk-management techniques are vital to trading success. And countertrend or mean-reversion trading, e.g., trading a rally in a bear market, is lower probability and is tricky and challenging even for the most experienced traders.
DISCLAIMER: This post contains commentary published solely for educational and informational purposes. This post's content (and any content available through links in this post) and its views do not constitute financial advice or an investment or trading recommendation, and they do not account for readers' personal financial circumstances, or their investing or trading objectives, time frame, and risk tolerance. Readers should perform their own due diligence, and consult a qualified financial adviser or other investment / financial professional before entering any trade, investment or other transaction.
