Short term crypto predictions: technicals pointing to more pain ahead
17:44, 8 September 2020
Cryptocurrencies have been under pressure in the past few days after seeing some positive momentum that was primarily fueled by a plunging US dollar and an environment of significant optimism in the markets despite the economic hardship caused by the pandemic.
A broad-market sell-off during Thursday and Friday seems to be permeating to the crypto market as well as the three bigger tokens – Bitcoin, Litecoin, and Ethereum – have all followed the behavior of stock market indices such as the Nasdaq 100 and the S&P 500, which declined 6.4 and 4.3 per cent during those two red days.
At the moment this is written, BTC is losing almost 15 per cent since Thursday, followed by Litecoin and Ethereum, which are losing 24 and 26 per cent respectively.
This latest turn of events poses a challenge to those seeking to draft short-term crypto price predictions as it is still too early to say if this two-day losing streak is just the tip of the iceberg of an upcoming downtrend or if the market is just adjusting the course before another bull run.
The challenge of drafting short-term cryptocurrency predictions
Reports from various media outlets have pin-pointed a spike in volatility to unusual activity in the options market, as traders have increased the size of their speculative bets by using derivatives to profit from a seemingly endless bull run.
In light of these, broker-dealers have been forced to hedge their options positions – which are mostly comprised by big-tech stocks such as Apple and Amazon - by buying the underlying assets tracked by these options, which has resulted in a self-fulfilling prophecy as the stocks have gone up as a result of the massive buying that followed these bets.
However, something has apparently shifted and dealers seem to have unloaded a sizable portion of these positions, which could be one of the reasons why the market took some heavy losses as a result of high-volume selling activity.
How does all of this affect short-term cryptocurrency investments? Well, although cryptocurrency supporters constantly push the notion that the crypto market is somehow disconnected from traditional financial markets, the evidence points to the contrary.
This means that cryptocurrencies have mirrored the behavior of broad-market indices during both extreme bull and bear runs as evidenced by the February-March market crash and its subsequent rebound – with both moves being mimicked by cryptos as well.
In this regard, the challenges of drafting short-term crypto projections include encompassing both the technical analysis of the individual tokens but in the context of how the market as a whole is moving.
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Bitcoin (BTC)
Bitcoin’s latest price action is sending a warning signal for traders as the price has stalled at a key support level after completing what seems to be a rounding top pattern with a floor at $9,950 per coin.
This is typically a bearish formation that follows a market top, which is not good news for those long on BTC at the moment.
BTC has held the $10,000 psychological level during the weekend. However, failing to maintain that stronghold could lead to a deeper sell-off, with the next support level found at the low 9,000s.
Other elements contributing to this bearish short-term crypto prediction for BTC include an RSI that shows a bearish divergence after making lower highs despite Bitcoin moving to its 2020 highs – similar to what has been seen in broad-market indexes as well – while the MACD is sending a clear sell signal.
Ethereum (ETH)
Ethereum fell from an uptrend from August on Friday and weekend sessions haven’t been too kind to it either. The price is moving towards a potential support at the $290 level, which corresponds to the uptrend that was formed after the February-March sell-off.
A move below that price could trigger much deeper losses although there are still many levels of support that could decelerate the steepness of the sell-off at some point if such a move is to occur.
The MACD provides further evidence for a bearish short-term crypto prediction for Ethereum, as the oscillator has slid to negative territory during the weekend while the RSI points to increased volatility as indicated by a widening channel.
Litecoin (LTC)
My last short-term crypto prediction features Litecoin (LTC), whose latest price action seems to have formed a head-and-shoulder pattern after the price failed to move higher than $65 per coin twice – the shoulders – while topping at $69 – the head.
Although it is a bit hard to determine the exact neckline, it is safe to say that the price has already crossed below that level and could be moving to the $40 level where LTC has found support since it recouped from the pandemic sell-off.
Similar to the other two coins, Litecoin’s RSI also shows that the coin made lower highs despite reaching higher levels, while the MACD is also in negative territory already, which points to a negative momentum for this token as well.
Bottom line for short term crypto predictions
The broad-market sell-off of Thursday and Friday seems to have dealt a strong blow to the crypto market with BTC falling from grace after a clean trend line break that pushed the price up to the $12,000 level.
Meanwhile, other major players in the crypto space – ETH and LTC – also show signs of bearish momentum, especially during the weekend’s trading activity.
The three coins are definitely feeling the pain of the broad-market meltdown and at least two of them – BTC and LTC are entrenched in traditionally bearish trading patterns – which adds up to an already gloomy outlook.
However, a rebound in the stock market on Monday – or Tuesday in the United States - could result in a trend reversal because the correlation between traditional financial markets and cryptocurrencies continues to be strong, especially during times of extreme volatility.
On the other hand, traders should be aware that the main drivers fueling this sell-off haven’t been still fully identified. Once they are, the situation could either turn into a nightmare scenario of further plunges or it could result in a progressive recovery of the situation that turns out to be just a temporary hiccup.
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