Apr 24, 2020
Bitcoin Will Flush Speculators at Low Prices as Markets Correct
Bitcoin short-squeezed and set a higher high while US Treasury bonds signal underlying weakness. What’s next?
Happy Friday, Alpha Traders. We made two amazing trades at the Bitcoin breakout of 7180 as well as a fast scalp, so before reviewing the overall market condition, let’s break those trades down.
Once a one-hour candle closed above 7180 to form a higher high, the next candle formed enough momentum that I felt safe to take a long trade. I entered the breakout candle and held to 7500.
Why did I choose 7500 to take profit, and why did I avoid the squeeze to nearly 7800?
If you look inside the consolidation period from the high set around April 7, Bitcoin (BTC) made lower highs as the order books accumulated stop-loss orders from the bears.
All these areas marked with an arrow were untapped, then when price finally made the push above the previous high, price quickly tapped into all of those stop-loss levels, resulting in a short squeeze.
Short squeezes do not indicate real volume. Rather, as price inches up, short positions are either liquidated or people manually close their shorts in anticipation of the price moving higher. This adds fuel to the fire, generating a several-hundred point move within five to ten minutes. Therefore, I did not attempt to catch this because it was not entirely predictable, it happened rapidly, and it deviates from my trading strategy, which relies on support-resistance (SR) levels. That is the nature of a short squeeze.
Now let’s break down the scalp trade.
If you dig into the five-minute chart (caution: I never recommend using five-minute charts to beginners) you can map out the real levels within that short squeeze. The candle body just below the wick of the short squeeze makes for a high, while the low can be spotted as support over the 7450–7475 area, which was the high of consolidation starting around April 7.
I bought Bitcoin when it touched 7475, knowing odds were high that this was a strong SR level. I set an exit point of about 7600 due to price tapping that level three times on the 5-minute chart. Whole numbers are typically strong SR levels that both algorithms and individuals pay attention to, while 7400 made for a good stop loss as a break below would indicate a breakdown of the channel mapped out on the 5-minute time frame. As you can see on the chart below, price honored the channel and I hit my target overnight.
You’ll notice that the SR levels I mapped on the lower timeframe are actually visible on the hourly and four-hour timeframes, but the five-minute timeframe allowed us to dissect the short squeeze amidst a spike in volatility.
Where I think Bitcoin is headed
Price will likely move sharply and hit the high around 7600, then start rolling back over and start chewing away the 7475 SR levels. From there, if the price retests the 7475 markers as resistance, I would view that as a short opportunity with a high probability for success. In that scenario, I’d place my stop above the 7475 SR levels and set take-profit levels near 7150, which is a consolidation period just before the short squeeze and visible on the one-hour timeframe.
Alternatively, if the price pushes above the channel at 7600 and maintains that area as support, then BTC will have a higher chance to reach 7800–8000.
If BTC breaks everyone’s heart and drops to 1200, challenging the pioneer investors and miners who invested early and are in it for the long haul, I would then say BTC has a better chance to accumulate to higher prices and ultimately be seen as a legitimate asset to investors at scale. For the time being, due to overall market conditions, I cannot side with those who believe BTC can only go up from here. As Bitcoin’s price continues to climb on the coattails of the overall market inflating with central bank stimulus, I am only more convinced that BTC’s halving event is priced-in. Now let’s take a bird’s-eye view of overall market conditions.
Be careful trading oil — it doesn’t work the way you think.
Oil dropped to -$40 (negative) when May’s contract expired, and I received a flood of messages from friends and colleagues asking “How do oil futures work?” The uptick in retail interest in oil futures worries me that new traders are going to be crushed as they attempt to trade June’s contract. Nothing has structurally changed in the oil market yet, so there’s no reason why June’s contract cannot fall near zero or even negative.
People who are buying the USO ETF may not realize that the ETF consists of other energy companies as well as 30% of June’s oil futures contracts. Therefore, the instrument is more complex than what retailers may realize.
I think USO will go to zero or be restructured; there’s too many speculators entering oil trades thinking they can buy and hold for the long term, but that’s not how it works. The excess supply and dismal demand may complicate futures contracts for several months, it’s dangerous to speculate on instruments that are undergoing volatile structural changes.
We aren’t out of the woods yet.
The S&P 500 has broken down from a rising wedge (bearish pattern), now I’m watching for lower highs and lower lows to print, which would gravitate price toward the SR level of 2627. A break below that would open the door for 2450.
This is critical: 10-year US Treasury bonds are trending lower.
Bonds are bigger than the S&P 500, they shadow the whole market and signal what’s happening under the hood of the economy.
The purple line on the chart represents 10-year US Treasury bonds, while the black line represents the S&P 500. Notice how during the 2008–2009 recession, both instruments bottomed together, then moved up almost in unison. Where are we now? At some point in 2018, equity markets continued upwards while bond markets began to downtrend. Then in March, equities collapsed, but quickly recovered. This time, bond markets haven’t followed. That’s not a good sign, considering US unemployment levels are floating around 26 million.
Major companies have declared bankruptcy or have had their bonds denoted to “junk” status. We’re not out of the woods, and the aftermath will affect high-risk, volatile assets like Bitcoin disproportionately.
Many of us have never faced an economic scenario like this in our lifetime. Be humble, stay safe.
Please stay tuned, Alpha Trades has an active community and produces content like this every day. Keep your stops tight and enjoy the weekend, folks.
A quick weekly forex trade round-up:
I took a short position this week on the EUR-USD pair around 1.087 and price hit my first target April 23. That made for a solid 1000-pip move.
Disclaimer
Information provided by Alpha Trades, LLC is not intended to be utilized in making any financial decisions and is not a solicitation, nor recommendation to buy, hold, and/or sell a particular product, digital asset, or ICO.
This article was adapted from our morning video, recorded at 7:30am, April 24, while the price of BTC was 7501.
