A Big Move's Brewing...

Volatility Contraction

In the past, we've written at length about volatility contraction.

This takes place when the market across the board gets tightly coiled following an explosive move.

We documented this action at the end of July before Bitcoin's historic 10 consecutive positive days, and towards the beginning of September before Bitcoin's liquidation cascade.

These periods of volatility contraction are important to pay attention to because as markets become more coiled, buyers or sellers are ultimately forced to front up. This period of shrinking volatility is often met with violent unwinds – in either direction. So when we see these periods of notable reductions in volatility, pay attention because the resolution often sets the tone for weeks and months to come.

We bring this up because Bitcoin is once again in a zone of notable volatility contraction.

The same applies when you look down the cap scale.

It sure is getting tight out there...

It's only a matter of time before the market picks a direction, so we want to sit up and pay attention to the price action in the coming days, as it could set the stage for the rest of the year.

Something's certainly brewing...

Profit Taking Is Complete

During bull market dips, there are a few tools at our disposal to get an idea of when selling pressure is exhausted.

We can look at prior support levels, chart out the polarity of the market, and identify momentum divergences, among many other tools.

The Spent Output Profit Ratio (SOPR) tracks the profits/losses being realized on-chain, so it can also give us a reasonable read into when profit taking is complete. In bull markets, holders are reluctant to sell at losses, so when SOPR undercuts 1, signaling that losses are being realized, supply has a tendency to dry up marking the bottom of the dip.

For a detailed explanation of SOPR, this post does a great job.

To push SOPR any lower, traders would have be willing to sell at a loss, which when we combine all the other developments taking place, seems like the lower probability outcome right now.

Buying Pressure Remains Intact

Our long-term supply squeeze ratio, which takes the ratio of coins in wallets longer than 6-months vs coins that have been in wallets for less than 6-months is approaching historically elevated levels right now.

As more investors scoop up coins from exchanges and HODL them in cold storage, it points to the accumulation on the part of some of the smartest money in the crypto asset class. This is consistent with the early innings of a new bull market.

We're also seeing significant net outflows out of exchanges as investors are using this dip to add to their holdings.

Looking back over time, this is an incredibly positive development that tends to proceed bullish periods in the months ahead.

Whales are still in a trend of accumulating coins that hasn't shown much sign of slowing down, and as we walked through in our latest conference call, is consistent down the cap-scale of trader cohorts right now.

When we combine this with the volatility contraction taking place and Bitcoin pressing right against all-time highs, the path of least resistance seems to be higher right now.

Assessing the Derivative Markets

Whether we're dealing with traditional markets or cryptocurrencies, we're always playing devil's advocate and looking for data points that go against our primary thesis.

We've discussed at length in recent weeks Bitcoin's elevated funding rates pointing to sustained bullish positioning on the part of speculators.

These elevated funding rates in the face of weakening price action have been a primary reason why we've been so neutral in the near term, which we've seen play out with prices consolidating since making an all-time high.

So given that we've yet to see a full leverage reset, we want to look at this elevated funding from two perspectives right now.

If the market continues grinding to new highs in the coming days/weeks, high funding is simply the cost of doing business in a bull market. High funding with rising prices happens all the time and isn't inherently bearish, it's only when there's a dislocation between prices and funding (as what took place when Bitcoin made an all-time high) that can produce a notable headwind.

But on the other view, if the market continues its streak over the last two weeks and moves lower, the risks of a long squeeze in that scenario are highly elevated. That's why under no circumstances we can be long Bitcoin and crypto, more generally, if Bitcoin is below 59,000.

So despite all the bullish evidence looking out longer-term, for this reason, we want to see Bitcoin take out 65,000 before we hold much conviction on further upside.

All-Time Monthly Closing Highs, Baby!

Funding and derivatives dictate short-term movements, but we thought we'd zoom out and look at Bitcoin's monthly all-time closing highs.

The most bullish thing a stock or crypto can do is go up, as we discussed here.

It’s not about the company’s earnings. This is not about the federal reserve.

It’s supply and demand.

If there is more demand for an asset than there is supply of it, the price is going to go up.

Market prices trend. We know that for a fact. It’s just basic arithmetic.

We know that market returns are NOT normally distributed. That’s why Technical Analysis works, because we’re identifying trends. That’s why permabears keep losing, because they’re ignoring trends.

The Bitcoin haters?

Trend ignorers.

You see, Technical Analysis doesn’t give us all the answers. But it sure goes a long way in helping us ask the right questions!

The most bullish thing a market can do is go up.

If you never listen to anything else we say ever, remember that one.

Speaking of making new highs, our recent darling Helium just did exactly that. This one is the butt of many jokes internally just because we're all getting involved with the Helium miners. It's been a lot of fun, and we'll have a blog post out soon on all the lessons we've taken away from the experience.

Our first target of 29 was hit yesterday, and we've seen prices respect this level so far.

But at the same time, we don't want to underestimate a breakout like this.

From our estimations, the crypto bull market is just getting started, so Helium is likely heading much higher over the course of the coming months/quarters.

Like we've been saying for all the names we've been buying (Avalanche, Solana, Algorand, Axie etc), we need to give them the benefit of the doubt looking longer-term.

These Fibonacci extension levels we use for setting targets are a great tool to manage risk along the way but keep in mind that if this new bull market is the real deal, these names are likely heading much, much higher than our initial targets. Simply holding long-term spot positions in a few quality names while managing risk is likely to be rewarded as opposed to getting cute and trying to swing trade every move.

Something to keep in mind.

We particularly like this Helium, it seems like an emerging leader.

We can add to positions if and only if it's above 26.50.

Be sure to let us know if you have any questions, or if you just want to reach out to say Hey!

Allstarcharts Team.