Crypto Market Analysis: Dead Cat Bounce Edition?

Crypto Market Analysis: Dead Cat Bounce Edition?

Disclaimer: This article is not financial advice. The author is not a financial advisor and this article was not paid for.

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After the precipitous drop in the entire crypto market, there are probably a number of individuals out in the space that are pleased to see that there appears to finally be some ‘letting up’ of the pressure that was being applied by the bears.

In the author’s opinion, the catalyst for this bounce came from the bears’ failure to push Bitcoin past its long-term support point for 2018, which was at $5.8k-$6k.

As noted before on many of the author’s platforms, the price of Bitcoin has not stayed below $6k for more than 24 hours throughout the entire year of 2018.

Even in major sell offs, such as the one that we just experienced over the last few days, the bears were unsuccessful in their efforts to push the price completely below $6k and hold it there for any substantive length of time.

Therefore, after failing at this endeavor once again, it is more than likely that traders that were short on Bitcoin began taking the opportunity to take profits during the consolidation period earlier.

In addition, many other traders that saw the bears’ inability to push the price down this critical support zone probably became much more encouraged to place a long position around the $6k mark under the pretense that they had caught the market’s ‘bottom’.

Reviewing the Price Change Among Top Coins

Below is a compilation of pictures showing the price action of the T100 coins from August 14th, 2018 — just 24 hours ago (data provided by CMC):

Data Interrpetation: As you can see above, the price of every single cryptocurrency in the T50 had gotten duly pummeled.

Some coins had even depreciated by as much as 30% during the sell off that took place over that 24H period. So, to say that the crypto market was experiencing shock would be an understatement.

Reasons for the Massive Sell-Off

This is probably the question that is lingering the heaviest in everyone’s minds — so, below is a crop of proposed theories for why the price dove so much over that 24H period.

Reason #1 — August Has Just Been a Bloody Month in General

Below is an illustration of the change in crypto market cap from July 31st to August 14th (the lowest point in the 7/31–8/15 period)

Crypto MC & volume information on July 31st.

As you can see from the pictures above, the total market capitalization for cryptocurrency dropped a grand total of $100 billion over that 14/15 day time span.

This represents an (approx.) 34% drop in the market capitalization over this 2-week time span.

Hopefully, one of the things that you noticed is an increase in the traded volume at the end of this period of examination:

This is not a coincidence, this is one of the trademark features of a bear market.

Understanding How Volume Works in a Bear Market

Now, typically, in a bull market (which is what we just exited), this is how the general trend of volume works:

  • As the price action goes upward, so does the volume itself (i.e., there is more traded volume for an asset the more that the price heads north). Many deem this trend with the phrase, ‘volume precipitates price’.
  • Similarly, when the price is headed south on a traded chart, this is usually marked by declining volumes.

Let’s look at an example of this during an indisputable bull period (November-December 2017):

In the picture above, notice how the periods of high, sustained price action northward vastly outweighed that of the sell volume.

If you look toward the end of the chart, you can see the opposite phenomenon (we’ll cover that next).

This is one of the dead giveaways of the type of market that you’re in.

If the volume during the sell off > volume during the buy, then you are in a bear market.

If the volume during buy offs increase as the price moves upward, and the volume declines as the price consolidates, pulls back, or moves downward, then we are more than likely in a bull market.

This is not an exact science, and you’ll obviously want to do a more quantifiable analysis rather than the qualitative visual that you see above, but the principle remains.

If you’d like to verify/confirm this for yourself, CMC + blockchain explorers are great source for ascertaining the raw data points where you can run linear regressions.

There Are Some Nuances to Volume in a Bear Market

Now, since we are in a bear market (indisputably at this point), the volume of sell offs will be > the volume of +% price movement.

However, this is a bit of a simplification of how volume works in a bear market.

Typically, when there is a sell off during a bear market, the volume of the sell off will not be remarkable. But the longer that the sell-off continues, the greater the volume of said sell off will be in the grand scheme.

So, you’ll start to notice that the candles will increase in size until eventually there may be a huge sell off at the very end before the price consolidates and either bounces or continues to move further down.

You can observe some of these differences below:

Now, let’s take a look at what the prices and volume currently look like.

Up to Date View on Price and Volume in the Crypto Market

As you can see the difference between what we first observed and what the market looks like at this point, is almost night and day.

There are a few things of note that should be pointed out, however:

  1. Bitcoin Dominance is still very high compared to what it has been throughout 2018. It’s floating at 53.1% right now at the time of writing.
  2. There are the same number of cryptocurrencies in the market, so the downturn in price did not wipe out too many projects.
  3. The market is currently up by 10.9% from where it was before.
  4. It appears as though the price of Bitcoin is now consolidating between the range of $6.2k to $6.5k, which is beginning to facilitate the growth of altcoins at the present moment.
  5. The volume has remained relatively unchanged. In fact, it is a little lower at this point (remember what we said above about sell-offs).
  6. The Twitter + alternative social media (Reddit, Telegram), sentiment has increased substantially (obviously), due to the uptick in the market.

Conclusion

It is difficult to determine whether the market has truly made a short-term reversal and will remain in this positive (upward moving) direction for the foreseeable future or whether this is merely a dead cat bounce.

What is a dead cat bounce?

Source: https://www.investopedia.com/terms/d/deadcatbounce.asp

It typically tends to look like this on a chart:

The above is a very possible scenario at the moment. However, it remains to be seen.

Thus, we will be evaluating the price action over time to see if we can determine any greater patterns as they develop.

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