The Wolf Den #24 - Buying Fear, Bitcoin Correcting, Risky Alts And More
Bitcoin Thoughts And Analysis
Bitcoin is presently breaking support on small time frames, but nothing is set in stone. Let's dig in and take a look.
MONTHLY CHART
Big news! I added a new line to the monthly chart for the first time in ages! It is clear to me that the $9,600 area (more like the $9,500s on lower time frames) is key for the monthly close. When drawing support and resistance, your bias is always towards the most recent price action. Like reading and writing in Hebrew, you start from the right and move to the left. 3 of the last 5 monthly candles have found resistance at this level, either with the top of the candle body or the top of the wick. It's significant, so I would like to see price closing this month above it. Also, the present candle structure is not particularly bullish, as discussed. It looks like a potential shooting star - but this would only be bearish if March's candle was red. Lots of time before we worry about it.
*Price has dropped further since I wrote this.
WEEKLY CHART
Clear rejection just below $10,540 two weeks ago, the line that we need to break to make a higher high. Pretty lame, honestly. On a macro level, this time frame still looks very bullish. However, I have mentioned a few times before that a breakout of a descending channel is often retested as support... so it would STILL be bullish even if price dropped to the $7,000s to make that happen. That would scare a lot of people! The 21 EMA is screaming to me as a likely area of support as well, near $8,800. There is a lot of confluence there, and as I have said for a couple of weeks, I have bids in that area.
DAILY CHART
There is a lot going on here. Price is currently breaking the support at $9,521 that it has tested multiple times with wicks below and closes above. That was a large part of the bull case, and will remain valid until this candle actually closes below. The next support for me is still THE LINE at $9,090, although price could still bounce above that. Price is in a bit of a bull flag at the moment, which obviously is still bullish even with a drop to the bottom support.
A closer look shows that the 21 EMA was broken and has flipped to resistance. The 50 EMA is just below and would be a strong candidate for a bounce. That is also in line with the local daily demand structure, shown as a blue channel. The bottom of this structure is the line at $9,090. That's why I believe this could still bounce above that.
The next areas of support are between the 200 EMA (around $8,600 but rising) and the $8,800 area mentioned previously.
4 HOUR CHART
Low time frames look like crap. Price is breaking support on strong volume and is currently trading below all 3 EMAs. I want to see price back above the 200 EMA and that blue line. RSI (not shown) is approaching oversold, but not there yet. This has more room to drop, in theory. I would love to see some bullish divergence form with RSI and a nice bounce.
Going Long And Short Are Not The Same Thing
I wrote a short piece in one of the early newsletters about going short vs. going long. I hashed it out to a full article for asktraders.com, and thought it appropriate to share it here. This concept seems incredibly simple, but is one that many traders fail to understand.
Altcoin Trades
Risky, risky, risky! With Bitcoin continuing to test support, the likelihood of a drop in the short term is strong. When Bitcoin drops, altcoins often go with it. That said, often to get the entries we are looking for on altcoins, it requires that drop to happen. Almost every altcoin I have looked at in the past two days is sitting on support - this could be a decent time to buy with a tight stop, knowing that you may lose a bit on the trade. The only reason to buy here is because the risk reward is good - not because you are certain that support will hold. That's a hard concept for some traders to understand, but it's similar to going all in on a poker hand when you know that you may only have a 35% of winning. The pot odds often justify the move, because the potential payoff is greater than the downside risk.
If you are not comfortable with losing, now is likely NOT THE TIME TO EVEN THINK ABOUT TRADING ALTS.
Note - nobody can watch every coin! I like to focus on a few and keep my eye on those. That is why I consistently mention the same setups. These are the coins that I am truly interested in trading at this moment. They come and go, but it's never more than a few at a time. That will spread you too thin as a trader.
ALGO/BTC
I have not taken a position on this for now, but it has my interest because it has been doing so well in the past days and week. My areas of interest are the green circles - I could see taking a position now, but I would rather wait and see if I can get the lower entry, or if this can hold the upper support.
LINK/BTC
I drew this a week ago and here we are. I filled my orders in the blue zone and at the purple line. The purple line is drawn from the previous all time high, and was not tested as support until today. That's where my orders have been sitting all week. Important to note, there's not much support because of the huge rise of this coin, so anything below the blue zone could lead to significant movement down. I don't want to still be here if that happens.
MATIC/BTC
I am still in this and still up. I have bought and sold a few times between 206 and 226, so I have done well trading this. At present, my stops are below the purple support and just below the 200 psychological level. If Bitcoin continues to drop, I will likely stop out of this position.
NEO/BTC
I am a few percent underwater on NEO, which is taking it's sweet time to play out. The setup has not changed, and neither have my thoughts. All of my bids have filled now after this retest of the blue line once again as support. My stops are around the purple line, which is below the demand zone (blue) and the descending wedge. Not thrilled with how this has played out, but I never expect everything to go my way. Let's hope it bounces from this area!
THETA/BTC
I have posted this daily chart many times in the past. I was trading this around the blue line and exited weeks ago with a tiny profit. I should have been more patient, although those funds have been used elsewhere for trades that moved a bit faster.
As you can see, price finally exited the trading range (black zone with dashed center line) around 10 days ago. However, it dumped back into the range once again and is just now exiting again. That peaked my interest after the big move yesterday, so I set orders around the top of the range which filled over night.
The picture becomes far more clear on the 4 hour. I TOTALLY MISSED the break of the descending line and clear retest (blue circle), which would have been an entry to salivate over. 1300 or so. Can't catch them all! That said, price once again exited the range yesterday on a strong move with increased volume, so I put orders at the top of the range for the retest as support. I filled at around 1450, in the green circle. Fingers and toes crossed that Bitcoin does not ruin this trade. I could be out of this very quickly.
XTZ/BTC
Nothing new to report! Just reiterating that my orders are around the previous all time high.
Buying Fear And The Coronavirus - For INVESTORS
This weekend saw massive losses across global markets, with Dow Futures showing nearly a $1000 drop before the market opened on Monday. With widespread fear and panic about the coronavirus and it's imminent spread around the world, people rushed to safe haven assets (like Gold and Silver).
It is likely that soon we will see some great buying opportunities in the market. This would not be the first time that I have bought a major drop on news.
Buying fear is a proven strategy, albeit a risky one if you are trading and not investing. If you have a very long time horizon, buying dips is a plan that has literally never failed, assuming you are patient enough to wait until your positions are no longer underwater. For someone who can leave the money they invest now in the market for decades, it is a very safe way to approach your portfolio. To that end, you have to be willing to continue buying the dip if the fear is real and markets truly correct. I am willing to do that, and I dollar cost average into the market with a large part of my portfolio anyway. I truly believe that markets will continue to rise over the next 20 years which is when I will be looking to largely cash out. So until then, I am a dip buyer.
As a trader, this is RISKY, as it amounts to catching falling knives. Yesterday, I bought the ROKU dip at $110, but quickly sold for a 6% gain when it bounced. That was a separate strategy and should not be confused with investing on dips.
Legacy Markets
Instead of focusing on individual stocks, let's take a look at the market itself. For those of you who have only traded crypto, you will notice some interesting correlation. When BTC moves, alts tend to react negatively. That is also the case when the market corrects as a whole - very few stocks will benefit from this action, even if the companies themselves are no worse for the war.
That said, the equities trades that I have posted in the past are largely invalid now and I stopped out of most. Losing on trades is part of being a trader! It's a bull market until it isn't, and things are really getting interesting here.
SPY
The SPY (SPDR S&P 500 ETF TRUST) is an ETF that is often used to track the market and is my favorite instrument for averaging into my retirement fund on a monthly basis.
The monthly chart looks hideous at the moment. Price has been printing bearish divergence with oversold RSI for years. The last monthly candle was a shooting star, with another one in the works. This chart is screaming market correction - but will that happens if the government continues QE and artificially propping the market up? Hard to tell. From the perspective of technical analysis, the top should be in for now.
So what do we do if the top is in?
I shorted the SPY today at the open, at $325. This is something that I did as a trader to hedge my long positions. I also shorted APPLE at $300, assuming that they will be disproportionately effected in the short term by Chinese factory closings and export issues. I DO NOT RECOMMEND THIS UNLESS YOU ARE AN ADVANCED TRADER.
On the flip side, I buy the SPY automatically, regardless of price, on the 1st of every month. That has been my investing strategy since 2006 - I bought through the market crash and ended up with a great cost basis, even though it was terrifying at the time! For now, I will look to fundamentally strong companies that are dropping with the market, but not because of anything directly relating to their business. This is challenging now, because some of my favorites, like Amazon and Apple have ties to China.
I will keep you updated as to what I am looking at and how I am approaching it.
Bitcoin As Digital Gold
***I wrote this yesterday. Today price is clearly dropping with legacy markets.
Bitcoin has failed to react in the short term to the coronavirus and market shakeup. Gold is ripping and equities and oil are predictably dumping. Since the Bitcoin market never closes and the global market drop was easy to see this weekend, Bitcoin should theoretically have reacted already if it was truly a flight to safety. This is a clear argument against the "digital gold" narrative.
Further, trading volume is relatively low, so even the narrative that price would have otherwise been dropping is dubious at best.
It has always been my position that a global economic collapse would more likely be bad for Bitcoin than good. Historically, people have never run from stable assets to riskier ones in a downturn - it just doesn't happen. In my opinion (which could be wrong!), Bitcoin would be one of the first things to sell off during a true financial crisis.
It is easy to point to the fact that Bitcoin has been the best performing asset in the world over the past decade as evidence of it's value. That said, this has occurred during the biggest global market bull run in history. The true test for Bitcoin will be how it performs when everything else is down, which is something that we are yet to see.
Just because I would expect the price to drop, does not mean that Bitcoin would not have actual value. As can be seen in places like Venezuela, Bitcoin quite literally saves lives and keeps people solvent when the currency goes to 0. Value and price and not the same thing. Value represents the amount of money that you are willing to pay for anything. Price is the amount of money that you are asked to pay for it.
All of this said, there is still a massive benefit to Bitcoin remaining uncorrelated from global markets. Bitcoin should be in every investor's portfolio, even if only a small amount, because it offers idiosyncratic risk - it exists in it's own microcosm, generally unmoved by outside forces. When everything is dumping, whether the price of Bitcoin rises or not, it's good to know that it's not DEFINITELY going to drop.
This may be Bitcoin's most compelling value proposition.
Here is an article I just read that seems to agree with my thinking.
The $45M Sim Swap
I have my doubt that this will be proven real, but it highlights the risk of keeping sensitive information on your phone - particularly emails and 2FA. This Chinese whale was allegedly hacked for 45 MILLION DOLLARS through a SIM Swap - the same kind of hack that I was a victim of. Whether real or not, this is yet another reminder that you are your own bank - get your security straight!
Tip - Take A 3% Profit On Every Trade FOR A MONTH!
This is an article that I wrote in the second newsletter - meaning that almost none of you saw it! I thought this was important to share again.
Taking losses is difficult. One of the hardest things to learn as a trader is how to set a stop loss and accept the hit to their portfolio when it fires. We have all experienced it.
What few traders talk about is how difficult it is to SELL. I would argue that taking profit is far more difficult than taking a loss. How many times have you watched an asset’s price rise, failed to take profit, and then been paralyzed as price dropped and turned into a realized loss. Should you have sold before your target and locked in profit? Should you have moved your stop loss up to breakeven? And how many times have you seen price reach your target - but you decide that price can go even higher and choose not to sell, only to see price drop once again.
Selling is hard. My mentor Christopher Inks once taught me a valuable tactic - he told me to teach our students to take profit at a 3% gain on every trade (when possible) for an entire month, no matter what. I thought he was absolutely crazy considering the opportunities in the crypto market at the time. However, I vowed to test it myself and found it to be an extremely valuable exercise. First, consistent small gains compound very quickly and can result in tremendous profit over a relatively short period of time. More importantly, this exercise teaches traders the value and importance of taking profit, regardless of FUTURE PRICE ACTION. It kills FOMO (fear of missing out) and eliminates the greed that is inherent in the human psyche - the urge to squeeze a bit more profit out of an already successful trade.
Try it and let me know how it goes!
The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor.