Market Update: 7 Sep 2020
With market correction Round 1 over, and the US holiday today — we take stock of the damage done, where the market could go from here and how much more pain could potentially be inflicted.
Negatives first
1. BTC (Chart 1) & ETH (Chart 2)
a. BTC and ETH both broke and closed below their major key levels — which needed to have held for the immediate uptrend to extend. These are now firm resistance levels that will need a fresh strong event-based catalyst to break through.
BTC — 11k break & close below 10.5k
ETH — 400 break & close below 360
We now need to see a close above 11k and 400 to declare the correction over. Immediate resistance is 10.5k and 360 — which the market needs to retake to starve off further downside. A 9k down-close (8.8k break) & 300 down-close (290 break) are the key trend defining levels that will signal a trend change.
b. Technically this looks like the perfect textbook reversal — a Head & shoulders top on BTC & an Expanding wedge top on ETH have targets of 9.5k & 250.
2. The trigger for the meltdown last week was purely miner selling — a sign that the expected pickup in BTC liquidity and especially market depth outside of the crypto world that could absorb such flow shocks, has as yet not fully materialized as much as most people make it out to have.
3. BTC is still closely tied to (positively correlated with) risk especially in the larger bouts of risk-off, with the sharp equity decline last week further amplifying BTC weakness — overall not a positive sign for its broad SOV (store-of-value) ambitions.
4. There was also negative news on the regulations front from the BOE (Bank of England) Governor, the first G7 central bank head to speak out on this in detail — highlighting the vulnerability that the crypto industry still faces from the regulatory threat.
5. The options market still holds an underlying bearish view even after this correction — with the Put/Call ratio open interest skewed towards puts showing the market still nervous and expecting more downside. The current 0.7 level is historically still near the highs of the Feb & May top (Chart 3).
Most of this is concentrated in the end-Sep expiry — and breaking down by strike (Chart 4), we expect there to be more gamma bids at the 10k level again this week from the puts the market owns, with the overall market short gamma under 8k.
6. Finally back to our big picture BTC Elliot wave count (Chart 5) — On the weekly chart a TD 13 sell followed by a Trendstall (Yellow arrow that has in the past signaled the defining high/low on many occasions) has marked the triangle Wave-D top — with this now being the final Wave-E correction.
The bullish possibility has this correction ending with a retest of the topside of the broken symmetrical triangle around 9150 by end-Sep; or if 9k breaks — then we will likely revisit the bottom of the triangle close to 6k, before the start of the large Grand Supercycle Wave 3 that first takes us past 12k and then beyond the old 20k highs.
Positives
1. The leverage market open interest in both BTC (Chart 6) & ETH (Chart 7) has normalized further in this sell-off, although we’re now just back to the pre-Black Thursday level in BTC, while in ETH we are roughly at $1bn.
A further positioning clear-out will set the stage for the big Wave 3 — where leverage participation will be low and the trend long and steady. The bull case here is similar to May/June where the leverage market deflates as price consolidates above 9k, However we’re wary that the market’s short gamma under 8k coupled with large leverage forced sells from below 9k could lead to another round of cascading deleveraging that can quickly clean out the OI similar to March (although we dont expect anywhere in the same magnitude).
2. The market has so far handled the deleveraging well — with the futures curve flipping into backwardation in BTC momentarily on Friday and over the weekend without any signs of market dislocation or stress. This is important for a healthy market that can take corrections breaking key levels without widespread end-of-world panic across the board. ETH however still remains vulnerable to some form of dislocation, and we see that spreads have widened across the board in the derivatives market on poor liquidity pockets already, a tiny canary in the coalmine even as the spot market remains healthy and functioning well.
3. BTC Hash rate still remains high (Chart 8 ) despite the correction — and not signalling any miner capitulation yet even with the large selling seen across mining pools last week.
4. Gold (Chart 9) and EUR (Chart 10) are both holding onto their key long-term trend defining support levels — and a new leg higher in the trend will develop should we bounce from here in both, that will drag BTC & ETH higher as well. However we’re watching closely as breaks in both these levels would add further pressure on BTC again. We’re watching a close below 1900 on Gold and 1.18 on EUR as the key levels for this immediate trend change.
Overall we continue to adopt a defensive position into the November US elections — expecting market uncertainty to keep growing into the event, resulting in people squaring up their books & large profit-taking especially on the more crowded positions. In our book we keep our short call exposure — expecting the topside 12k resistance to continue to hold out for an extended period; while rolling our short puts to strikes below 9k. At this crunch point theta is the most valuable commodity and we keep our short puts as short dated as possible while owning gamma around all our key levels.
