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Analysis

The Crypto Correction: What You Need To Know

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In the short span of about 24 hours prices of cryptocurrencies have fallen like a stone. Investors have either given back or taken losses of sizable amounts. Measuring the one-day drop: bitcoin -21%, Ether -29%, Litecoin -29%.

From its December all time high near $20,000, bitcoin has given back more than $200 billion in value. This amounts to more than 80% of the companies on the New York Stock Exchange or Nasdaq. Even for those who have experience-trading crypto, the events of the last few days can challenge nerves.

What is the right plan of action? Possibly no plan at all, by that I mean sitting tight and doing nothing, could be the best plan. What ever you choose, the first thing to do is to shut down your computer and turn off CNBC. These are all entirely emotion driven groups and right now they are making loud negative headlines reminding us of quotes from JP Morgan CEO Jamie Dimon and Warren Buffett.

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The same sources are painting a dark case today. These are the very same folks that were gaga over crypto last year while prices were rising. Now these sources are quoting Warren Buffett who predicted with a high degree of confidence that cryptocurrencies will have a bad ending.

If you listen to Christopher Harvey, Head of Equity Strategy at Wells Fargo, you get an even more dire prediction. He recently appeared on CNBC stating that the cryptocurrency price correction could spill over into the overall stock market.

There is a rule of thumb on Wall Street. If you are right 51% of the time, you are considered an investment genius. This means most opinions are wrong at least half of the time. This could be the case with today’s crypto naysayers.

Prices And Business Fundamentals Don’t Always Match

The number of true experts in cryptocurrencies is small relative to the number of investors. That means there is more emotion than usual driving prices in both directions. It is this volatility that keeps certain investors on the sidelines.

But if you have done your research and have a view of the world in 2028 short-term volatility is not your enemy. Warren Buffett, the biggest crypto naysayer is a master of long term investing. During the 2008 financial crisis, when the world was close to the brink of financial disaster, Buffett was standing by with billions to loan Goldman Sachs charging an outrageous 10% rate of interest. There is a lesson for us here.

Don’t Get Distracted By Short Term Issues

Korea is a big market for crypto demand and, along with China has produced headlines threatening to close down cryptocurrency exchanges. I have not dealt directly with any of these so the analysis of others is necessary.

These folks point out the excessive price premiums as evidence of the behavior of bad actors in the game. So any action by governments to clean up the exchanges could produce a better experience for investors. And let us not forget cryptocurrencies are global. There are plenty of exchanges in the world that make markets.

Korea does not have a monopoly on bad actors. The exchange and lending platform Bitconnect, in recent days, announced that it is closing. The company was recently served with a cease and desist order. Ethereum founders had criticized the exchange for their practices that many believe were bordering on a Bernie Madoff style Ponzi scheme.

The Tipping Point Has Been Reached

The jury is no longer debating the verdict. Cryptocurrencies have become embedded in the global economy. According to Google’s Annual Report on Search Facts, bitcoin and cryptocurrencies were the second most important topic in the world during 2017.

Bitcoin is all about fast, anonymous, low cost movement of money anywhere on the planet. Those lofty goals have not yet been achieved but with tens of thousands of businesses now accepting bitcoin including some hefty Fortune 500 companies and with the Bitcoin Lightning Network coming on, bitcoin’s shortcomings are being addressed.

Bitcoin Futures: Acceptance Is Spreading

When I learned that bitcoin futures would be traded in the US by the CME and CBOE, the only question was how long it would be before other countries recognized the legitimacy of bitcoin futures. Well, it didn’t take long. The Hong Kong securities regulators, SFC issued a report on December 11th giving investors a green light.

Within less than a year futures contracts will be available on Ethereum and possibly others.

Ethereum: The Future Is Here

Ethereum has always had a more obtuse purpose. It was never intended as a medium of exchange like bitcoin. For what it is worth, Ethereum is less likely to be singled out by governments and central banks that fear loss of economic control.

Descriptions like decentralized blockchain platform offering smart contracts and driven by Ether require some time to appreciate. Ethereum is open sourced and applications oriented. You don’t need to understand the technology you only need to envision what it can be applied to.

Ethereum co-founder Steven Nerayoff tells us the number of Ethereum projects today is already ten times the number of last year. Here are just two examples.

Unilever

Unilever, the $52+billion food and packaged goods giant, is working on a blockchain based project to better manage its massive global supply chain. So far it is only being tested but consider the size: 10,000 Malawian tea farmers. And this is just the start of their massive corporate wide supply chain. Imagine what this will look like if Unilever starts to take things seriously: stay tuned.

On The Vanguard

Now the $5 trillion Vanguard group is getting the blockchain bug.  They are the investment industry’s low cost provider. Now they are embarking on test to apply blockchain technology for data sharing.

Caveat Emptor

The reality is the cryptocurrencies are embedded in the global economy and likely to grow dynamically for a long while. This doesn’t protect us from short-term events. That is why huge price corrections are so interesting. The Warren Buffett habit of always having deep cash reserves to pounce on opportunity when frightened investors run is a strategy that has worked well over multiple decades.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.4 stars on average, based on 76 rated postsJames Waggoner is a veteran Wall Street analyst and hedge fund manager who has spent the past few years researching the fintech possibilities of cryptocurrencies. He has a special passion for writing about the future of crypto.




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3 Comments

3 Comments

  1. mrmajestic

    January 18, 2018 at 9:53 am

    I like the sentiment of the article. Slightly dodgy spelling and grammar, it jars me a bit when i see elementary spelling errors like “what ever”. I expect the grammar to be on the same level as the rest of the article, higher quality.

  2. incog13

    January 18, 2018 at 11:36 am

    Consider this, though: What happens if the G20 countries all agree to heavily regulate cryptos or outright ban the conversion of cryptocoins to fiat (leaving company blockchains unregulated, though)? I don’t see how the cryptos could recover if they are relegated to the poorer part of the world, with the rogue states, etc.

    Any thoughts?

  3. Chris G

    January 18, 2018 at 6:53 pm

    Bingo

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Analysis

Long-Term Cryptocurrency Analysis: Correction Deepens but Leaders Remain Stable

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As the major cryptocurrencies got hit hard this week, losing around 20% on average, the long-term picture in the segment got close to an entry point for investors. The overbought readings that developed during the late-April rally are now cleared and although the short-term trends are still clearly negative, we still expect the coins to resume the recovery. With that in mind, long-term investors could start accumulating the relatively stronger coins.

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On a negative note, even the leaders violated key support levels during this week’s selloff, but the secular long-term trends are not yet in danger. The prior leaders Ethereum, EOS, and IOTA are still in the center of attention, as we expect them to form a bottom soon. Bitcoin and the other relatively weak coins, like Litecoin, Monero, Dash, and NEO are still lagging the form a technical perspective, but they are also well above the support levels that would indicate an end of the secular bull market.

BTC/USD, Daily Chart Analysis

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Bitcoin is below the key $7650-$7800 support level and it remains the biggest drag on the market, despite a brief period of relative strength this week. The upper boundary of the base pattern that we identified in April is found near $6150, with a weaker zone around $6500, and with the short-term trend clearly being negative, the latter might be tested before a bottom forms. Further resistance is ahead at $8400, $8700, and between $9000 and $9200, and traders and investors still shouldn’t enter positions here.

ETH/USD, Daily Chart Analysis

Ethereum is testing the $555-$575 support zone after violating the $625-$645 range, with the declining short-term pattern being intact. A bottom near the $500 would still keep the recovery intact, but the correction low might already be in, and investors could already add to their holdings here. Further resistance zones are ahead between $735 and $780 and near $845, while support is found near $450.

(more…)

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 257 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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Analysis

Pre-Market: Oil Plunges Below $70 as Markets Mixed Before Long Weekend

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Financial markets are relatively calm today, despite the hectic week that was highlighted by the Turkish currency crisis, wild swings in bonds, and a step back in US-North Korean relations. Stock markets turned lower globally, with US equities outperforming the rest of the world, essentially drifting sideways all week long, thanks to the slight correction in the Dollar’s rally, and the dip in Treasury yields that was triggered by the dovish Fed meeting minutes.

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S&P 500 Futures, 4-Hour Chart Analysis

Today, the durable goods report came out before the opening bell and although the headline number was a tad worse than expected the more important core figure beat the consensus estimate, helping the slightly dampening economic outlook, even as yields continue to fall, especially with regards to long-dated Treasuries.

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EUR/USD, 4-Hour Chart Analysis

Although emerging market currencies are way less volatile today than recently, despite the rebound in the Dollar, equities shed their early gains and are now slightly in the red. The all-important EUR/USD pair hitting yet another 6-month low near 1.1650, and the test of the key long-term 1.1450-1.15 zone looks more and more likely in the coming weeks, even as the pair is a bit oversold.

Energy Markets in Turmoil as OPEC Signals Production Increase Again

WTI Crude Oil, 4-Hour Chart Analysis

It seems that the crude oil market is in for a strategic switch yet again, as the OPEC, together with Russia made it clear today that the price of the Black Gold finally reached a desirable level. The cartel will be targeting a higher level of output later on this year in order to keep the US shale players under pressure by capping the advance in the key commodity’s market.

The WTI contract reached a 4-year high at $72 per barrel recently and the Brent contract which is more exposed to Middle East woes rose as high as $80 per barrel after trading below the $30 level just two years ago. The last phase of the advance extended above the level where a large portion of the shale plays turn profitable, and as global growth worries also surfaced, the commodity entered a selloff this week.

Gold Futures, 4-Hour Chart Analysis

Safe haven assets continue to be bid despite the relatively calm environment, and gold hit a two-week high today despite the bounce in the Greenback as buyers are back after the wash-out plunge below $1300. With the long-term setup and fundamentals still being favorable for the precious metal, the short-term downtrend line is in danger here.

As US markets will be closed on Monday, which usually favors an active session, volatility might remain high throughout the day.

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Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 257 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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Recommendations

Trade Recommendation: Intact Financial

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Technical Overview

  • Since double-bottoming in 2008 and 2009 at $26 (violet horizontal trendline in Figure 1), Intact Financial (IFC.TO) has enjoyed a four-fold increase. During the 2013, 2016 and 2018 corrections, the stock found support at a long-term trendline (support – green trendline; retests – green arrows).

Figure 1. IFC.TO Weekly Chart

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  • Zooming in, after topping in November’17, IFC completed a H&S pattern (tops – yellow ellipses, neckline – yellow trendline in Figure 2).
  • In January, March, April, and May, all up-moves halted at a well-defined short-term resistance (red trendline). Yesterday (May 25), the stock managed to break and close above the resistance.
  • Today, the stock closed in positive territory, whereas the Financial sector (TTFS.TO) declined by over 0.5%.
  • The $95 level had served as support on multiple occasions in 2018 (purple horizontal trendline and arrows).

Figure 2. IFC.TO Daily Chart

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Implications

  • The bounce off of the long-term support and the break above the short-term resistance are considered constructive.
  • The stock is expected to find support in the $95 – $96.50 range during pullbacks (i.e. at the red and purple trendlines).
  • The downward target from the H&S pattern was nearly met during the May decline (target – $92.25 – white vertical trendline in Figure 2, May 9 low – $92.65 – last purple arrow).

Outlook

  • Short-term bullish as long as the stock remains above $95
  • Long-term bullish as long as the stock remains above its long-term support (green trendline in Figure 1).

 Trade Recommendation

  • Buy the stock at current levels ($97.50 at EOD on May 24).
  • Target: Half at $101 (the January low which served as resistance in March – second red arrow). Other half at $108 (origin of the late 2017 decline).
  • Stop: Half upon a close below $95. Other half upon a close below the long-term support (currently at approximately $93.50).

Disclosure: No position yet but may initiate at any time. Will likely recommend the stock to my clients as a potential play within the financial sector.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.8 stars on average, based on 12 rated postsPublished author of technical research. In his work on price “gaps”, published in the 2018 International Federation of Technical Analysts’ Annual Journal, he developed a new technical tool for analyzing and trading the “gap” phenomenon – the “K-Divergence” (http://ifta.org/public/files/journal/d_ifta_journal_18). Besides obtaining a Master in Financial Technical Analysis, he has completed a BBA and an MBA from the Schulich School of Business in Toronto and has completed all exams for the CFA, CMT and CFTe designations. Currently, providing research to investment management and financial advisory firms. http://www.linkedin.com/in/konstantindimov




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