The start of last week for the main markets was not encouraging at all. Most financial markets started the week in the red. The major stock indexes in the United States fell sharply:
The cryptocurrency market was not immune to this fall. The price of Bitcoin was down and reached $ 43,000 / coin at the end of Monday. With this movement, the price of Bitcoin had a retracement of approximately 11%. An 11% drop is not as dramatic in the cryptocurrency market as these digital assets are known for their volatility.
It is effectively due to this volatile characteristic that several investors remain skeptical about the use and value of Bitcoin. Many of them wonder if Bitcoin should really be considered digital gold. It should be remembered that Bitcoin is considered "digital gold" by many specialists since it has similar characteristics to gold. Both gold and bitcoin are important within an investment portfolio as it helps diversify the investor's risk. When there is turbulence in the markets, investors seek to protect their wealth by removing their equity capital and reinvesting it in gold or bitcoin.
So why did the price of Bitcoin have a more significant drop than the major US stock indexes? This is a very difficult question to evade as the proof that there is a positive correlation between stocks and Bitcoin is overwhelming. The following graph shows how the S&P 500 and the price of Bitcoin moved very similarly in the last 3 months.
According to an article published by Bloomberg, the correlation between Bitcoin and the S&P 500 has been high in recent months. In fact, now this correlation is at its highest point since October 2020.
What was it that triggered the price drop for Bitcoin and other markets?
Here are the narratives that many news networks and publications used to explain this price drop in different markets:
The Evergrand Group: The world's leading stock indices reacted negatively to the news that The Evergrand Group, one of the largest real estate development companies in the People's Republic of China, is unlikely to be able to meet its obligations and therefore not can pay its investors (bondholders). This caused speculators around the world to sell financial assets that are considered risky as stocks, believing that an economic crisis in China could slow growth and affect different world economies.
The Delta Variant : Many specialists consider that the new variant of COVID-19 is not only a cause of alarm for the health of the population but also for the economy. According to the United States Center for Disease Control and Prevention (CDC), this variant is much more contagious than previous variants. This would make governments take more rigorous measures and therefore the economy does not proceed to a complete reopening in the short term. As a consequence of this, speculators tend to sell their financial assets causing steep falls.
There are probably more narratives as to why the markets fell at the beginning of the week, but as a technical analyst, all of these narratives are just that, narratives. Technical analysts believe that any external factor, whether political, social, or speculative is discounted in the price. This means that only by looking at the charts you could anticipate a fall in the price of Bitcoin. Let's look at the Bitcoin price and volume chart.
Tradingview. Bitcoin / USD (Daily TF / Log Scale)
From the end of May 2021 to the end of August 2021, the price of Bitcoin moved sideways with $ 30,000 a support level and $ 40,000 a resistance level. A resistance zone is an area where speculators are willing to sell. It is in this area that sellers are more anxious and aggressive than buyers. The opposite happens with the support zone. It is an area where speculators are willing to buy. It is in this area that buyers are more aggressive and anxious than sellers. Simple, right?
It is at the beginning of August 2021 that the price of Bitcoin breaks the resistance zone and begins to climb rapidly until it collides with the yellow line. This yellow line is an extended line of what was an uptrend line which began in March 2021 and ended in mid-May. Generally, when the price returns to this yellow line, the price tends to reverse. That is why the price of Bitcoin went from being worth $ 52,000 to being worth approximately $ 40,000 in just two weeks. This sharp change in price tells us that there is very strong downward pressure. There are no speculators willing to buy Bitcoin above $ 42,000.
On the other hand, the volume, which is an important variable as confirmation of a trend, shows that while the price of Bitcoin broke the resistance zone and continued to climb, the volume of transactions decreased over time, clearly causing a divergence between the price of Bitcoin and the volume of transactions. Rising prices accompanied by low volume usually suggest an oversaturated market. This divergence indicated a reversal in the price of Bitcoin that could occur at any time.
What can you expect in the next few days? What was a resistance zone usually turns into a support zone? There is a concept in technical analysis called the "Polarity Effect." That is, a previous support level becomes a resistance level and vice versa. The psychology of speculators changes when circumstances change.
Tradingview. Bitcoin / USD (Daily TF / Log Scale)
For now, the $ 40,000 level is acting as new support as of this writing. We will see next week if the price of Bitcoin consolidates in this zone or finds support lower down.
Every Monday, I will publish a technical report on cryptocurrencies and other markets. If you have any questions, please don't hesitate to email me at firstname.lastname@example.org.
Note: the information you find in these reports is not financial advice. Your investment in cryptocurrencies or another asset has to be proportional to your level of understanding of it.
Until next time!