THE LIQUIDITY ZONE
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THE LIQUIDITY ZONE

Descending Channels; L1’s Soar

December 20, 2021

Last week we discussed the choppy trading environments that follow liquidation events and the importance of treading carefully in these conditions. Ranging price action can be interpreted as an expression of uncertainty; price simply needs to aggregate the necessary liquidity before resuming a trend. The market moves in cycles (some might even say fractals!) of expansion and consolidation, and the sooner you embrace current conditions as simply another natural stage in the market’s wheel of life, the sooner you can adjust your trading strategy accordingly. With all that being said, there is a sense of direction that is taking shape, so let’s dive into the charts.

While premiere L1’s SOL, LUNA, and AVAX made valiant bullish efforts over the past week, both BTC and ETH remain stuck in glaring descending channels.

And this really shouldn’t be much of a surprise. Several weeks ago we looked at historical data which suggests that after liquidation events, price tends to form a range high off of the relief bounce before dribbling downward to take the range low, and the current descending channels on both BTC and ETH add confluence to this prophecy being fulfilled.

From a liquidity gap perspective, things aren’t looking any better. The BTC weekly closed through yet another liquidity gap at 49.3k, while the 3969 LG level on ETH, which has thus far acted as support, finally gave away after being battered for four weeks straight.

This sets the next logical targets for BTC and ETH at $39,600 and $2650 respectively. Ouch.

In the face of extreme adversity, AVAX, SOL and LUNA put in impressive rallies this week. The weekly AVAX candle formed a bullish sweep + LGR (AKA a GOAT reversal pattern), putting us on for longs to the all-time high, and LUNA managed to breakthrough resistance to form a completely new all-time high.

Under trending conditions I would jump at these setups, but the anchorage on BTC and ETH makes me weary of venturing into alts. We’ve seen before how alts can rally before another expansive down move, and it’s difficult for me to see a world in which these L1’s continue moving up while the two biggest pairs in crypto remain bearish.

While we wait patiently for BTC and ETH to react at the range low, I’d recommend staying focused on seeking out setups like this one:

ETHPERP, 2021–12–16, 23:30

4h, sweep + LGR

30m, sweep at 4h LG fill level & 30m LG fill level & LH sweep (tons of confluence here)

2m, BMS, fill, sailed to 9R

The close through the 4h level gave us the target of the unfilled LG down below, and our trigger was a lower high 30m sweep at both a 4h and 30m level. The 2m BMS signaled placing bids at the origin candle, which were filled before price went straight to target. Lower high sweeps at both a 4h and 30m logical level have a very high strike rate (disclaimer: according to my own personal backtesting data) so I will confidently take them every chance I can get. If the setup doesn’t present itself on the pairs in my watchlist, I simply do not trade that day.

Of course, these setups will fail. No system has a 100% strike rate, and correct decision-making doesn’t guarantee a winning result. Recognize that you can take great trades that are losers and poor trades that are winners (the latter being by far the most damaging to a trading career). Be someone who takes great trades, and that starts with being patient, managing risk, and following your rules confidently.

If you want to swim across the English channel, leave your doubt on the beach.

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