There's a common adage around here, a bit of advice to "draw your lines with crayons, not pens and pencils."
What it means is that when you're drawing support and resistance levels, it's best to construe them as zones rather than in terms of a single price.
It's a good rubric and a sound principle. But it makes sense to explore in greater detail why this is the case, particularly for cryptocurrency.
When it comes to this new asset class, technicals are a far more popular choice among traders and investors. It only makes sense in a market where there aren't nearly as many sophisticated fundamentals.
You're not going to discount a crypto project's cash flows to arrive at a valuation; you're going to trade the chart.
But, amid the growing popularity of technical analysis, proponents often don't recognize why price action principles work. There's far more to understand beyond drawing rectangles on charts.
Yesterday, we explained how we're still approaching this recent rally with a high degree of caution.
Most names still find themselves below overhead supply, and this is a tape where whipsaws and fake-outs are likely to continue.
Beyond Ethereum and a handful of other names, this rally hasn't been widespread. Instead, most cryptos are still exhibiting generally weak action.
While this means there are still actionable ideas out there from the long side, we want to explore a higher-conviction trade over more substantial time frames that'll likely be prone to fewer whipsaws.
With the market providing extreme readings, these are conditions by which we can anticipate a mean-reversion rally higher. At the same time, trying to catch this move in a period of continual whipsaws will be difficult.
We think the better trade is to remain patient over the near term while dollar-cost averaging into long-term spot positions with a multi-year time frame.
Over the weekend, we've seen a sharp rally higher, driven by Ethereum $ETH.
It's all about knowing what environment we're in and adjusting our tools and strategies accordingly. In environments like these, buying into breakouts is a dangerous game.
In our last letter, we reviewed the recent quarter and provided a structural view of the market.
In a tape as messy as this, we're focusing a good portion of our strategy on longer time frames. The market has been and continues to be a mess on shorter time frames, while equity markets still firmly reflect risk-off behavior.
With the market providing extreme readings, these are conditions by which we can anticipate a mean-reversion rally higher. At the same time, trying to catch this move in a period of continual whipsaws will be difficult.
Technical analysis in its very nature is simply following reality. We're not tied to position, a narrative, or whatever story journalists are spinning up. We're never dogmatic in our approach and are always open to changing our approach as new data comes in.
We've been discussing a lot internally with all the analysts the lack of actionable crypto trade ideas we've published. Don't get us wrong, we love trades. But equally, we need to be aware and mindful of when the very act of trading itself is detrimental to our portfolios.
There's no such thing as catching every move. I see this a lot in the crypto community, where traders often feel like they need to predict every rally.
There isn't some random giga chad or MM slinging every move. It just doesn't exist. If anything, the blowups we're seeing all across the place among the most sophisticated crypto funds (3AC et al.) are a testament to this.
As we turn the page of another quarter in cryptocurrencies, we leave behind one of the most volatile 3-month periods the asset class has ever seen in its brief history.
Losing a whopping 56%, Bitcoin saw its second worse quarter in its history. Meanwhile, Ethereum lost 67% of its value in this period. By all accounts, this is now one of the most severe crypto bear markets by loss realization, wealth destruction, and capital leaving the ecosystem.
