The Non-Negotiables of Crypto Analysis

Here are six simple steps we live by when opening the door to these new digital assets:

1. Price. Support and resistance. Polarity.
2. Fibonacci extensions and retracements.
3. Relative strength analysis.
4. Momentum.
5. On-chain Analysis.
6. Other technical supplements: moving averages, VWAP's, etc.

First up is Price

This is where Technical Analysis all begins.

This is supply and demand 101.

We talk about momentum and we talk about trends. We use words like Volume and Moving Average. This is all fine and dandy, but all of these are only a supplement to actual price analysis. Price is the only thing that pays. So price, by definition, is the most important technical indicator that exists.

For an in-depth look at the dynamics of support and resistance, this is a great primer.

There are an endless amount of examples showing just how much the market respects these support and resistance levels, so we'll just touch on a few of our favorites.

Just take a look at Litecoin pushing against its 2018 highs in May earlier this year:

This is exactly where buyers lost control, and Litecoin proceeded to lose over 70% in just two weeks...

And what's even better is that price stopped going down right at these 2019 highs of 140.

This is just such a pure example of polarity at work:

We can't discuss support and resistance in these cryptocurrencies without mentioning the base breakout in 2017.

We dug through the archives to find our Bitcoin chart in March of 2017, with a price target of 1,630. Isn't that hilarious?

Did we know that Bitcoin was going to sprout into this trillion-dollar asset and become one of the greatest trades over the last decade?

Of course not!

But we knew at the time that we wanted to be buying this internet money once buyers absorbed all that overhead supply.

The same rules that have governed public markets for over a century still continue to work beautifully.

And of course, here's a more recent example of when Bitcoin eclipsed its 2017 highs.

It took a few weeks for demand to absorb that overhead supply.

But once they did, Bitcoin went on to achieve many of our upside objectives - which brings us to our next tool:

Fibonacci

Again, we're not interested in making this a 10,000-word dissertation. So for those interested, here's the best place to go for those new to Fibonacci analysis.

Bitcoin and these other cryptos respect these Fibonacci levels more so than any other group of assets in the World. It's truly amazing.

To bring us back to 2017, the peaks and troughs of Bitcoin's bull market corrections aligned perfectly with the extensions from the 2013-2017 base.

Here's a chart from a post all the way back in October 2017:

It's almost as if Bitcoin and these other cryptocurrencies are dictated by High Middle Age mathematics - it's truly beautiful.

And the crazy thing is that Bitcoin is still respecting the extensions from this base 4 years on:

For instance, this 30k level we've been harping about recently coincides with Fibonacci extensions dating back to 2013, the 2018 crash, and the Covid correction. That's three consecutive and independent events all coming together to produce this critical level.

We could talk about Fibonacci forever, so let's move to our next tool:

Relative Strength Analysis

Just like if we were buying Apple or Freeport McMoRan, we're expecting the names we own to be outperforming their alternatives.

Relative strength is truly a non-negotiable tool for any market and any asset.

So not only do we want to be looking at these coins priced in USD, but we want to see how they're faring when priced in Bitcoin, Ethereum, and even some of the other Altcoins.

In this case, Polygon $MATIC was one of the greatest performers during the latter stages of the alt season earlier this year. Relative strength was tipping the hat of MATIC long before it began working:

And the same works in reverse.

Not only do we want to know who's leading, but we need to be aware of the laggards too.

Bitcoin Cash was a clear example:

Even though BCH was breaking out of this tidy base earlier this year, it was NOT being confirmed by the relative trend, which was clearly down.

If you'd bought this breakout, you had massive opportunity cost on your hands when you could've been positioned in the leaders.

And when the entire space crashed, BCH ended up being one of the more badly injured compared to its peers.

Relative strength is king, or a lack thereof in this case.

Let's keep the ball rolling and focus on:

Momentum

When we buy an asset, crypto or not, we need it to be moving, right now.

Every week we're in a sideways position, we're holding dead money that could be better put to use elsewhere.

We've written about how we incorporate momentum into our process countless times, so here's a good primer.

Apart from buying or selling assets in particular momentum regimes, sometimes the most powerful signal is when momentum doesn't agree at all with what's happening.

A majority of the infamous peaks and bottoms in Bitcoin have been proceeded by these momentum divergences:

It'd be simply irresponsible to ignore these signals when they come across our desk.

On-Chain Analysis

This simply relates to what's happening on the blockchain, hence the name On-Chain data.

Some people like to think of these data points as fundamental information. That couldn't be further from the truth.

Technical analysis is the study of the market and market participants. Positioning via crypto exchange balances, the number of transactions from a coin, investor flows in and out of wallets all meet that criteria.

Using our prior example of Polygon, just look at the major outflows of MATIC from exchanges throughout its entire trend higher, acting as kindling for further price appreciation:

And then a few days before MATIC peaked, exchange balances saw a sharp uptick, meaning that investors were already in the process of offloading their bags.

We hope that gives you some greater insight into how we're approaching these assets.

Is there anything missing from this list?

Get in touch, we love to hear from you.

Allstarcharts Team