Monday, April 02, 2018

Has The Crypto Market Reached Maximum Pessimism?

It's been a few days since I've posted anything, mainly because I have family visiting, which involves them taking new employment near where I live and then relocating to here. A lot of work to be done in a very short span of time, basically.

That pause in my blogging has given enough time for something to occur that I've been wondering about and looking for, maybe: I have been watching for signs of  "maximum pessimism" in the crypto space.

Maximum pessimism is the state of affairs where after a long period of punishing declines in the price of some thing or a whole market, many of the so-called "weak hand" traders and investors finally capitulate and sell off their positions. Some time after they have done so and gotten out of the market, a reversal occurs. How long it takes for that reversal to appear is anyone's guess, but considering how fast-paced crypto markets are, I would expect it to occur soon, because I think the moment of maximum pessimism has passed.

Consider this snapshot of the daily Bitcoin chart. The latest big event that was supposed to bring further pain to Bitcoin HODLers was the appearance of the "Death Cross," a technical analysis formation many traders watch for that is supposed to indicate the emergence of a long-term bear market. It is the crossover of a 50 day moving average line with a 200 day moving average line, heading down. Moving averages are plotted on the chart by taking the average of the price (opening or closing, depending on how you set up the indicator on your chart) over the number of sessions specified; 50 and 200 days, in this case. This gives you a picture of the near and long term price trends and is used as a backwards looking tool to forecast future trends. On the chart, the Death Cross is visible, having occurred this past Friday, displayed here as the cyan line crossing over the red.

If you count the candlesticks from right to left, you can see that there was major selling five days ago, which in my time zone was occurring on Thursday, March 29th, just ahead of the appearance of the Death Cross. And then... nothing.

So now, here we are, Bitcoin have bounced off of a previous low, which you can see by looking left on the chart, back to candles that represent activity that occurred during the first week of February, when prices hit these same levels and then began the short term rebound that took Bitcoin to a recent high around $11,500. Then as now, other indicators are pointing to a rebound: a price close to a 50% discount from the most recent high ($11,775, achieved on February 20th), price action below the 200 day moving average (again, the red line), and a Relative Strength Indicator reading below 40, placing the current prices deep into "oversold territory" (the RSI is the purple-ish box with the green line at the bottom of the chart).

And last but not least, the much feared Death Cross, which in this case appears to have merely confirmed what was already known, that we have been in a down trend for some time. Given that moving average indicators are "lagging indicators," meaning they can only display data derived from what has happened, they do not indicate what will happen in the future, just what might happen. In cases like this one, the Death Cross can take so long to appear that it is in effect playing catch-up to what the market already knows, and its formation only serves to scare away the last of the weak hands, evidenced by what has now happened: a lack of further drastic selling and successful "defense" of a price at a prior major support level.

The other thing I look for as an indication that the moment of maximum pessimism has passed is the character of the headlines reporting on the thing or market I am tracking. For the last several weeks, a search for "Bitcoin" on the news tab of the Google search engine was turning up piece after piece of doom and gloom.

This morning, the first page results looked dramatically different:
 So here we are, perhaps at the end of the bloodbath of the last few months. If going forward from here sentiment seems to continue to improve, and if the current low holds, then this might finally be "it." Time will tell, but as for me, I've already repositioned a few things in case this is the turnaround, and I may add some new funds in addition. As Sir John Templeton said, "The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell." I think this could be the former, so off I go, preparing to take advantage of the latter at some point down the road ahead.

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