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BTC – Comprehensive Review of Correction and Market Data for BITSTAMP:BTCUSD by misterbumble

What an exciting day! One of the strongest selloffs this year. First- were there any signs that hinted this was coming? And what does the market look like now? Lets look at some market fundamentals prior to and following the selloff.

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TLDR/SUMMARY:

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The simplest way to describe today- we saw a chain liquidation of longs today. Spot activity looked normal so this didn’t appear to be a mass selloff as much as a derivative selloff. It was a very effective cleansing of the market from overleveraged longs and new/inexperienced traders. This resulted in a 15% drop in price over 1.5 hours at peak, which is significant. In total it posted a 19% drop top to bottom.

But the beauty of this price action is how -precisely- it responded to key levels. 1.) the peak drop bounced decisively off of the bull market support 21w MA at $42.9k; 2.) the price recovered to the 200 DMA at $46k and confirmed support there (thats where we sit currently); 3.)after 8 hours of fighting resistance at $52.7k Bitcoin fell under the 12h 20 EMA and if you remember my earlier posts when we fall under that, we average around a 19% drop… which is exactly what we posted today.

Now the fact that we respected the 20/ 21w MA support and after bouncing we recovered the 200 DMA is important, it shows confidence remains high in the bull market, despite this move. It also cleansed the market of overextended long positions which is a healthy “reset” for the market, because the longer you wait to flush overleveraged traders, the harder it hits (reference 3rd week of May).

However this is still a precarious position. Its good that bulls were able to recover and retest these levels. Its bad because it gave some power back to bears, which means bulls will have to fight to regain $50k and higher.

A bullish scenario from here is simply to hold the 200 DMA ($46k) level or higher. A weaker bullish position could be to fall under 200 DMA but still hold a range above the 20/ 21w MA support band ($42-43.3k). If we fall below those, look at the 200 EMA around $41.2k as our next support.

What to watch in the coming days (if you are a bull)? Watch the Open Interest (OI) in the market and look for it to climb along with price, watch Bitcoin Netflow and look for it to remain negative (indicating buying), look for exchange reserves to continue declining. And of course watch levels and we ideally don’t lose the 20/ 21w MA band, meaning we want to stay over $42k. If we close under it signals bulls losing strength.

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Detailed Breakdown of Supporting Network and Exchange Data:

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  • Exchange Inflows: Inflows are another word for “coins moving onto exchanges,” this usually leads to increased selling pressure. In today’s selloff we did not see a notable change to exchange inflows; in fact both spot and derivative exchanges report an overall inflow downtrend since mid July. Local and cycle tops report massive inflows along with the selloff, and in this case spot traders were largely unmoved. This still looks bullish to me on higher timeframes.
  • Exchange Netflow: Netflow represents the net result of all selling and buying across exchanges. If there is more selling that means netflow is positive, and more buying shows netflow as negative. This expands on the inflow/outflow formula to show what the overal trend might be on a given timeframe. We are reporting overall (spot and derivative) negative netflow since 26 August. This includes today- which means that bulls remain confident, it not a little shaken after today’s price action. We reported a minor uptick in netflow for spot, but nothing that looks worrisome if you compare to historical selloffs. This is overall still bullish to me.
  • BTC Exchange Reserves: Exchange reserves mean the totality of Bitcoin holdings on exchanges. Again we can tell a lot from the trend on reserves. If reserves are dropping, that suggests bullish sentiment in the market since more Bitcoin are leaving exchanges than are entering.

    From April until the May dump we saw reserves climb, indicating traders taking profit. Reserves look generally neutral until the last week of July when we suddenly logged nearly 100,000 Bitcoins leaving exchanges in what I suspect was kickstarted by institutional investors.

    But that brings us to today- and we didn’t see an increase in reserves, but instead are posting nearly two weeks of decreasing BTC reserves. That feels overall bullish to me.

  • BTC Open Interest(OI): Open Interest represents the totality of open trades on exchanges- longs and shorts. Basically this is a way of measuring the conviction of the market on a specific position.

    If price is climbing and you see OI climbing, this suggests the market is confident in buying at this level, ie . bullish sign. But if price is climbing and you see OI dropping, this suggests that bulls lack confidence at this level and expect a reversal soon. Additionally if we see a massive price drop accompanied by liquidations, those liquidations will drive OI down as they force traders to close positions.

    Today we saw OI drop to levels not seen since the first week of August, fueled by massive liquidations on derivative exchanges ( ie . overextended longs got liquidated).

    This can be healthy for the market, because it reduces volatility and leads to more organic price action, so its not a bad thing- yet. In recent hours OI plateaued, but we will monitor it in the coming days to see where the interest goes, to bears or bulls.

    Note that in many earlier chain liquidations like this lead to a period of bearish pressure as it shakes new or inexperienced traders from the market, weakens bulls confidence and can rally bears.

  • Miner Position Index ( MPI ): This is the ratio of BTC miner inflows compared to the 1 year moving average. Higher numbers indicate miners are selling, and historically this indicates a market top is close. Miners mostly continue to HODL/accumulate and had no role in today’s action.
  • ☙ Network Value to Transaction – Golden Cross: This is a variant of an indicator created by the well known crypto analyst Willy Woo. It looks at whether a crypto asset is overvalued compared the value being transacted across its network, and can be used to identify local tops or bottoms in the market.

    I like this one because its the only indicator (I’ve found) that can correlate with miner activity earlier in the year. BUT never one to rely on only a single indicator, I only use it to supplement other data. In this case its still near the most bullish end of its range, indicating we have the potential for additional upside in the market. So again overall bullish on higher timeframes.

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