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Analysis

Why do Markets Like Bitcoin & Ethereum Violently Correct?

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I was asked a question recently about what causes markets to correct so violently. While the answer to this question is obvious to all seasoned traders, I thought I’d spend a few minutes answering it for those who are relatively new to this arena.

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There are several reasons, but there are a few that stand out as the most compelling.  The first is paper profits.  At the start of every major bull move there are many people who bought early.  As the markets reward them for their buying decision they are increasingly happy (of course).  But they understand that their ‘profits’ are only on paper until they sell. They realize that if the market falls back to where it began, their windfall will be gone, if not reversed to a loss.  It puts them in a conundrum because they all want to sell the top, but where is the top?  Every trader has an ever-increasing anxiety as their position grows in value.  With each uptick they have more to lose.  Everyone wants to be the first to sell, but they don’t want to panic and sell too soon.  It is nerve-wracking.  Those who were long Ripple last night were in this position.  That is for sure.

When there is a red candle each trader must make a decision, and there comes a time when many people decide, at the same time, to lock in their profits, and the way they do this is to sell.  The initial selling puts fear in the hearts of those who were brave just a moment earlier, and the selling soon takes on a life of its own. Eventually, prices reach a point where other traders decide they want to buy at that price, and the selling is overcome by new buying.

The next reason is stop losses.  Most traders use stop losses which close their position if the market moves against them.  It is a wise practice, but it often results in positions being closed at the worst possible time.  Selling at the low, or buying at the top. (I hate that, but I wold rather suffer a rash of such aggravating losses than be wiped out in a single market event.)

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There are a slew of cunning traders out there with the market power to ‘run the stops’ .  They know that after a huge move there are a ton of stops out there, and they can pretty well guess where they are. By looking at the chart they can see where most people put their stops.  They know that if they can start a reversal and cause it to move far enough to trigger the stops, a chain reaction will ensue, causing the market to move sharply in reverse.  Before they begin the process these traders put in buy orders ( or sell orders, depending on market direction) at the low they expect will be hit.

I can’t prove it of course, but I am reasonably sure that the ETH massacre last month at $52 was just such an affair.  It was ruthless and financially devastating to many traders.  It may seem unfair to newbies, but this business is a knife fight, and there are no rules in a knife fight.

The last major reason is margin calls.  I advise new traders to NOT use leverage.  Only trade what your account allows you to buy or sell. Leverage is awesome when you are on the right side of a trade, but quite cruel when you are not.  Also, it forces you to sell in a panic, even when you don’t want to.

If you are using leverage you cannot wait out the violent swings.  A friend of mine bought ETH at the $21 high and still had them at $6, because he did not buy them using leverage.  I’m sure it was painful to the extreme to hold them, but he believed they would eventually go up again.  As of yesterday he was up more than 5x!! His patience was amply rewarded.  If he had used leverage, he would have been left with a significant loss when the inevitable margin calls were issued.

I usually do not trade with leverage, though on occasion I will.  I simply hate the added pressure of margin calls.  There is enough pressure in this business without that headache.  But, opinions differ on this point.

Here is a brief look at the major coins as of this morning:

Bitcoin

I still think Bitcoin is over-extended and ripe for a fall. I would close any long positions I had here.

Ripple

XRP is still a buy here.  I suspect .20 is in the cards in the next few weeks.

Litecoin

Litecoin is a buy with a target of $30, then $36 if $30 yields.

Ethereum

Ethereum is a buy here. I have a feeling that $150 is on the horizon.

ETC

ETC is a hold until it clears the $7.5 high.  If it does that, it could double to $15.

ZECUSD

ZEC is a buy. It could go to $140.

XMR

Monero is a buy. It could go to $40.

REP & DASH

These two are a hold.  They have resistance to get through before they can make significant gains again.

Remember:  The author is a trader who is subject to all manner of error in judgement.  Do your own research, and be prepared to take full responsibility for your own trades.

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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6 Comments

6 Comments

  1. [email protected]

    May 6, 2017 at 9:11 pm

    Hi Jim
    Quick question,,, which exchange do you prefer for cryptocurrencies?

    I currently trade in Poloniex but I do not think that I can exchange into USD so I am thinking on moving to kraken.
    On Poloniex I believe that the price of bitcoin affects my other investments,,am I right? ,,,,

    I bought Litecoin but it seems that even though the Litecoin price remaings about the same if bitcoin takes a dive, the value of my portafolio get afected as well,,,, Am I correct?

    Thank you in advance for taking the time to answer my question

  2. Gabriel

    May 6, 2017 at 11:11 pm

    Wise words again, thank you for this article.
    Given the long term trends, there is already very decent money to be made by buying and holding for a few months/years, with very little to worry about. Margin trading is too risky unless you are extremely well informed.

  3. xrolo24x

    May 7, 2017 at 5:55 am

    Fascinating, thank you!

  4. Ershad

    May 7, 2017 at 12:14 pm

    Hi Jim,

    Thanks for your article, I sold some of my XRP at 0.000075, I wanted to ask can you recommend a good price to get back into the market?

    Kind regards,
    Ershad

  5. ialkeilani

    May 8, 2017 at 3:00 am

    Wonderful article…very educational. And thanks for running your summary across this many list of currencies as many people have been trading across several ones nowadays

    • Jim Fredrickson

      May 8, 2017 at 3:24 am

      Thank you for the kind words …

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Analysis

Daily Analysis: Dollar Falls, Gold Jumps after Yellen’s Final Move

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Wednesday Market Recap

Asset Current Value Daily Change
S&P 500 2668 -0.02%
DAX 13125 -0.45%
WTI Crude Oil 56.65 -0.68%
GOLD 1258.00 1.35%
Bitcoin 16,100 -6.32%
EUR/USD 1.1842 0.73%

The Federal Reserve hiked interest rates as expected today, and although the central bank’s monetary statement was slightly more hawkish than expected, the market’s reaction didn’t reflect the much-anticipated move. The worse than expected Core CPI reading that underlined the low-inflation narrative weighed on the recently strong Greenback, while stocks were unchanged after decision and bonds gained ground as yields retreated.

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EUR/USD, 4-Hour Chart Analysis

The major indices are hovering near their all-time highs with the DOW leading the way higher, hitting a new record for the second day in a row. While volatility Is expected to remain low as we approach the end of the year, market internals and valuation levels are still concerning from a long-term perspective, and stocks outside the US are also negatively diverging. The action in crude oil could be slightly more interesting as the commodity is starting to act in a slightly bearish manner after a grinding multi-month rally.

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WTI Crude Oil, 4-Hour Chart Analysis

The Brexit process is still in the center of attention in Europe, although volatility took a nosedive on the old continent as well, and it’s unlikely that the Christmas period will be much different, given the predictable drop in volumes and trading activity. The date of the next election in the financially and politically troubled Italy has been set to March 4th next year, and the early date caused some turmoil in the countries assets, which dragged the Euro Stoxx 50 lower today, together with the DAX and the other major indices.

Cryptocurrencies

As the total market cap of the crypto-market crossed the incredible $500 billion mark, Ripple, NEO, and Ethereum made headlines with lofty gains in the face of the severely overbought readings elsewhere in the segment. While XRP and NEO are still not overbought from an investment perspective, Ethereum reached our final target for its break-out and triggered a long-term sell signal.

ETH/USD, 4-Hour Chart Analysis

The previously surging IOTA continued its correction, Litecoin consolidated in a relatively narrow range, while Dash, ETC, and Monero scored marginal new highs before turning lower together with BTC. The most valuable coin that has lost some of its momentum “mojo” in recent days fell back below last week’s highs, and that could mark a failed break-out and a start of the deeper correction that seems more and more likely.

BTC/USD, 4-Hour Chart Analysis

Key Economic Releases on Wednesday

Time, CET Country Release Actual Expected Previous
11:30 UK Average Earnings 2.5% 2.5% 2.3%
11:30 UK Claimant Count Change 5,900 3,300 6,500
11:30 UK Unemployment Rate 4.3% 4.2% 4.35
15:30 US Core CPI 0.1% 0.2% 0.2%
15:30 US Crude Oil Inventories -5.1 mill -3.6 mill -5.6 mill
21:00 US Fed Rate Decision 1.5% 1.5% 1.25%
21:00 US FOMC Statement

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Analysis

Technical Analysis: Volatility on the Rise Again, as Ripple and Ethereum Hit Targets

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Ripple has been the star of today’s session in the cryptocurrency segment, as the only major coin on a long-term buy signal in our trend model continued yesterday’s break-out, and surged to a new all-time high. The currency cleared the $0.425 level that marked the top in May, and after the more than 6-month long consolidation phase, it promptly neared the $0.50 level.

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While the short-term momentum indicators are now stretched, the coin is still in an encouraging long-term setup, although the best period to buy already passed. The coin could be dragged lower in the case of the expected broad correction in the segment, but we expect XRP to outperform in the coming period, with support levels found at the prior high and below that in the range between $0.30-$0.32.

XRP/USDT, 4-Hour Chart Analysis

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Ethereum has been the other top coin on the rise, as the second largest digital currency surged past the final range projection target of the break-out two weeks ago at $685 in the aftermath of the launch of the BTC futures on Monday. The ETH token is now also on a sell signal on all time-frames, and we advise investors and investors to wait for the next major correction to establish new positions. Support levels are now found at $575, $500, $480, and $400.

ETH/USD, 4-Hour Chart Analysis

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Analysis

Technical Analysis: Bitcoin Grinds Higher as Records Tumble in Altcoins

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The historical surge in the segment, which is the second such move this year, continued today, with another round of break-outs in some of the major altcoins and tepid gains for BTC investors. Ethereum, Ripple, Dash, and first and foremost Litecoin was leading the charge, with the recent star LTC topping $300, just after a day of hitting the $200 mark.

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Litecoin defied all odds after reaching extremely overbought readings, and the coin rode the speculative wave, turning exponential, not unlike IOTA and Bitcoin previously. With the coin being stretched in an unprecedented way on all time-frames, investors could even consider selling their core positions at the current levels, as a deep correction is almost granted in the coming period. The first meaningful support level is found at $125, and a re-test of the $100 level is probable during the next major correction.

LTC/USD, 4-Hour Chart Analysis

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Ripple finally ended a long period of relative weakness today, and the only major on a long-term by signal jumped over primary resistance at $0.26 and crossed the $0.30-$0.32 too in the euphoric sentiment. As the coin is not long-term overbought following the 6-month long consolidation, the buy signal in XRP remains intact, with the only major resistance level being found at the all-time high near $0.425.

XRPUSDT/USD, 4-Hour Chart Analysis

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