In yesterday's note, we outlined how we're approaching the market in the aftermath of this volatility.
Bitcoin remains stuck between strong support in the low 30,000s and resistance around 42,000.
Unless we're buying dips to the lower end of the range or a break above this resistance zone, there's not a whole lot to do in terms of trading either Bitcoin itself or most of the individual alts.
This message most certainly remains relevant despite yesterday's recovery.
But in evaluating the names leading this recent bounce, relative strength has been concentrated in names we've been pointing to in recent weeks.
Names like Cosmos $ATOM, Terra $LUNA, and Fantom $FTM all held up reasonably well in relative terms and have also been leading this recent recovery bounce.
These are three of the best-looking names in the entire asset class from a relative strength perspective.
We anticipate that if the market continues this bounce, these three names will lead the recovery higher.
Given the lack of demand observed on-chain combined with the growing macro uncertainty, the dip back to the low 40,000s appeared to be a low-conviction buy.
Since publication of those two notes, Bitcoin's subsequently lost a critical level of support and now hangs in a no man's land.
The same themes we've discussed over the last two weeks remain intact, so this report will serve as an interim update.
If you're a trader, you don't need to pretend to understand the underlying.
Money flow is the only thing that moves markets. Everything else is just noise.
We pride ourselves on always adjusting our thesis to new data and never being dogmatic in our approach.
In the case of cryptocurrencies, it's been made out that gold and Bitcoin are sworn enemies.
Bitcoin is the "better store of value," they argue.
This black-and-white mentality does considerably more harm than good to investors.
If you're a trader, your only job is to follow money flow, not to assert your views on the market.
We bring this up because, when it comes to gold, there are early but constructive signs developing, with the shiny metal beginning to work its way out of an 18-month downtrend.
In yesterday's note, we outlined our patient approach in the face of this messy tape.
For the most part, we're sitting on the sidelines waiting for an uptick in investor demand to drag the market out of this correction.
Current price action is being heavily driven by the futures market, which will only serve to increase the probabilities of whipsaws and fake-outs that can wear on traders' emotional as well as their financial capital.
Additionally, when evaluating the altcoins, there isn't any edge in being positioned aggressively long.
As we'll explore in today's post, many names look vulnerable for further near-term downside, and even most of the leading alts have lost much of their bullish momentum over the last few days.
While most cryptocurrencies themselves have done well since the summer, many of the most prominent crypto stocks and miners have been painful underperformers.
But, given that many of the biggest coins are in the process of forming potential tradable bottoms, there are early signs of this changing.
Many crypto stocks are also in a process of testing critical levels of support, and the risk versus reward is currently more in favor of the bulls over bears.
Before we dive into individual names, here's a look at the sector as a whole.
In Monday's report, we outlined how conditions haven't fully developed for a high-conviction dip-buy. We're anticipating a high concentration of whipsaws before these assets find a tradable bottom.
At the same time, from a risk-versus-reward perspective, the recent pivot lows are proving to be important levels of interest right now.
In a weekend note, we'd asked whether this was simply a retest of the crash low -- or whether it was still crashing.
Fast-forward today, and the market is respecting this level -- certainly an important one to be watching.
Over the last few weeks, we've been pointing to the growing leverage in the derivative markets exacerbating volatility.
In our last report, we also outlined how we're anticipating this to unwind in the coming weeks. This continues to be the key theme for the first quarter.
Additionally, a variety of metrics suggest the market is strongly in oversold conditions, offering a favorable level for long-term investors to add to spot positions.
Meanwhile, derivatives and macro conditions present a headwind for speculative dip-buyers.
High open interest combined with diminishing implied volatility, increased price stability, and thin futures volume all contribute to a scenario where the probabilities of a long/short squeeze are elevated.
We're still in elevated cash positions and, for the most part, still sitting on the sidelines.
Last week, we outlined how the recent recovery in leverage in the derivative markets combined with thin end-of-year liquidity would exacerbate volatility. This same message continues to ring true.
Open interest is elevated, and the market has become susceptible to an unwind via a long/short squeeze in the coming weeks. Even a small supply-and-demand catalyst has the potential to cause a big shift given these current market conditions.
We want to dedicate this week's report to describing how we're approaching this period and defining the probabilities we're weighing with each scenario.
