The Wolf Den #266 - Trade With The Chart, Not With Your Heart
Bitcoin Thoughts And Analysis
DAILY CHART
Boring. Chop. Sideways.
Bitcoin continues to do very little, giving few convincing signals of conviction by either bulls or bears. The impending death cross, which is not a meaningful signal for me, may not even happen but still looks days away if it does. This signal is likely a result of the previous drop and not a harbinger of bad things to come. Either way, the 50 MA is slowly turning up.
The fact that people are watching it makes it worth looking at, and you can see that the 200 MA has currently rejected price and is strong resistance. That is the red line. Ultimately, we want to see price above that, 42K and the 50 MA to start talking about bullishness. The 42K to 43K region is the kay at the moment, because we really want to see a higher high and this major resistance flipped back to support.
For now, the trend remains down until proven otherwise, but with very little conviction.
4-HOUR CHART
Locally, price has made a sequence of higher highs and lows. The question mark indicates a potential higher low, which is not confirmed until another higher high is made. That's how this works, technically. You can see that we currently have a very simple and clean resistance to support flip at $38,425, so that is an area to watch if you are trading on lower time frames, which I obviously am not. If that breaks, there are plenty of areas below where there's local support. Very hard to discern much at the moment on Bitcoin.
I often like to look at the line chart to remove the noise and take a clean look at price action. This is also how I search for divergences, as line charts only account for closes, like RSI.
As you can see, we have a nice bull flag forming on the 4-hour line chart. If you look with candles, there was one wick up on the 4-hour that makes the pattern less attractive.
This is only valid if we see a clean breakout of the descending resistance. As I often mention, bull pennants often break support and become flags, which is exactly what happened here. We had an ascending support which failed and price dropped to form the parallel channel. A pennant is a triangle. A flag is a channel.
The target of a breakout would be around $45,000, an area that many are already watching.
BOTTOM LINE - Bitcoin is still ranging, chopping sideways, in a down trend after dropping from 65K. A break above 42K would be the first real sign of true bullishness, but there's still quite a bit of resistance at various areas ahead. We need to see serious volume and buying interest, or price is likely to continue ranging between 30K and 40K. Nothing to do here but wait.
Not surprisingly, the community seemingly became very bullish again around 40K - right at resistance. That's what humans do.
Altcoin Charts
For those of you who are new, I usually share altcoin charts and setups in this section, the caveat being that I am very strict about only posting charts when the market looks good. Alts have been suffering on their BTC pairs for quite a while now, and there's no immediate indication that this is likely to change. As I often mention, doing nothing is a position for a trader, and sitting on your hands when market conditions are suboptimal is an important aspect of risk management. Scanning altcoin charts, there's very little of interest at the moment, so they all carry additional risk.
Bitcoin still drives the altcoin market. At the moment, I believe that there are rationally more negative scenarios for alts than positive. A large move up by Bitcoin is likely to hurt alts, as is a big move down. Even with Bitcoin sideways, altcoins have not done particularly well of late. For now, I will remain sidelined as a trader. I still have my investments and am largely just doing nothing.
Also, I offer SETUPS not SIGNALS. I share charts of what I am watching and trades I would take if certain criteria are filled. The idea is for you to take this information and incorporate it into your own system.
MATIC/USDT
I have shared this a few times. Again, there is no trade here yet, just a setup and it is only valid if the descending line is broken. Here's what I shared before:
Polygon (MATIC) has outperformed the market throughout both the bull run and correction, so it is always wise to watch this coin. There is no trade here yet, but it has setup with a perfect symmetrical triangle and gives an obvious trade opportunity on a break in either direction. A break of support would be a sell or short signal and a break of descending resistance would be a clear buy signal with targets above the recent highs.
You can see that this has alternating touches up, down, up and down, which confirms the pattern. We also have decreasing volume throughout the triangle, which is normal for consolidation before a break out.
For educational purposes, there are a number of ways to ascertain potential targets on a setup like this. First, if you believe that this is a bull pennant (it’s too big for my liking to qualify), then you measure the length of the flagpole in blue. When price breaks out, you pull this blue area to the break out and measure up to find the target.
Many use the depth of the triangle to determine the target, which would be the idea in red. You also measure this from the breakout.
Finally, many believe that the target should be determined by pulling the support line and drawing a parallel line from the top of the pattern. You can see that this offers the highest target.
There are many ways to skin a cat.
Regardless, set an alarm on the descending line and enter on a break or retest if you are looking to trade this.
Legacy Markets
AMZN (AMAZON)
This is an updated setup from last week, when price was around $3,200 and at the weekly 50 MA and trading range EQ. You can see that it has bounced beautifully, which means that it should be targeting the all time high at the top of the channel, around $3,552. The big trade here would be a break of the range highs and a move back into price discovery, which is what I will be watching for over the coming weeks. That said, there is still room to get to resistance at the range highs.
Amazon is an investment for me, I buy dips and do not actively trade it and have been doing so for years. The most recent dip was my last purchase.
Chart Requests
Here is a video with your chart requests from yesterday. The charts still look confusing and broken after the recent drop - hard to discern clear patterns or trades. Still, you should find some solid educational content and ideas.
The Mechanics Of A Meme Stock Rally
By Sahil Bloom:
“Meme stocks” like AMC and GameStop have captured the attention of the financial world. But few understand what is actually driving these furious price rallies.
The mechanics of a meme stock rally:
First off, what is a meme stock? There is no single definition, but meme stocks can be understood as stocks that experience rapid upward price movements as a result of collective social media evangelism.
The price movements are typically not related to business fundamentals.
AMC and GameStop are the two most salient examples of meme stocks from recent memory. Both experienced furious, Reddit-fueled rallies that left the financial establishment scratching their heads.
Heroes emerged, like fearless leader @TheRoaringKitty (who is not a cat!).
But how did it happen?
Emotion (FOMO!) and the power of crowds played a role, but I’ll leave those to the sociologists and psychologists to analyze. There are two underlying financial dynamics at play: a short squeeze and a gamma squeeze.
Let’s cover the mechanics of each:
First, a short squeeze.
The "short" in "short squeeze" refers to the concept of short selling.
The basics are covered in this thread.
TL;DR - short selling is a way of betting against a stock - i.e. betting that its price will decline.
"Short interest" is a measure of how heavily an asset is shorted by the market. It is the total number of shares that have been sold short (borrowed and sold), but have not yet been covered (bought and returned). It is usually measured as a % of the # of shares outstanding.
A "short squeeze" occurs when a heavily-shorted asset experiences a rapid upward price movement. When this happens, short sellers may be forced to close their short positions (i.e. buy the stock and return it to the broker), further accelerating the upward price movement.
In the case of the recent meme stocks, as AMC or GameStop stock rose, short sellers were forced to close their shorts all at once. This created a surge of buying (to return the borrowed shares) and drove the price up further. It created an accelerating upward price movement.
So that’s a short squeeze, but what about a gamma squeeze?
It’s a bit more complicated, but let's attempt to simplify it here... A gamma squeeze is all about options contracts and their indirect impact on the underlying stock.
For a primer on options, see this thread.
When you buy a call option on AMC, someone has to sell you that option contract. You pay them a bit of money (the premium) and they make a commitment to deliver you the underlying stock at a future date for the strike price of the option. It's a pretty simple transaction.
But in the background, the seller (often called a "market maker") has to think about their risk exposure. If AMC rises above your strike price, they will have to buy the stock at the market price and sell it to you for the strike price, incurring a (potentially large!) loss.
To hedge this risk, when the market maker sells you the option, she also goes into the market and buys a bit of the underlying stock. The amount of stock she buys is based on the "Delta" - a ratio of how much the option price moves relative to a $1 move in the stock. "Gamma" is the rate of change of the "Delta" of the option.
As Delta and Gamma rise, the market maker gets more and more nervous! She has to buy more stock to hedge the risk of the option being exercised in the money (i.e. with the underlying price above the strike price).
So here we have the (simplified!) makings of the gamma squeeze.
As call option purchasing volumes on AMC suddenly surged, market makers had to purchase a lot of AMC stock to hedge.
This set in motion a self-fulfilling prophecy... Market makers rushed to purchase AMC stock to hedge exposure. This drove the price of AMC up! As the price of AMC went up, the Delta and Gamma of AMC call options rose.
This meant market makers had to buy more stock, further driving up the AMC price!
Reflexivity.
So to summarize:
With AMC and GameStop (and other meme stocks!), we had both (1) a short squeeze - short-sellers frantically buying the stock to close/cover their shorts and (2) a gamma squeeze - call option market makers frantically buying the stock to hedge their exposure.
The Market Reacts To The FED’s Charade
The idea of a “free market” has become an oxymoron, as displayed by the FED’s recent update. Rather than honest valuations of assets based on supply and demand, we now discover price through subtle hints at what will happen down the road with inflation and interest rates. The tone of FED Chairman Powell's tone is enough to trigger large intra-day market moves, even if he alludes to things that will happen next year. And they say, “crypto is manipulated.” Crony capitalists are frothing at the mouth at any hint of more stimulus, buybacks, QE, and money printing. A hit of monetary drugs keeps the system pushing forward another day. A hint at rehab is enough to push the market down.
As James Powell put it, “you can think of this meeting that we had as the ‘talking about talking about’ meeting. In coming meetings… we will provide advance notice before announcing any decision to make changes to our purchases.” The FED is scared to stop stimulating the economy or cutting back in any measure. It’s like they are letting us know they will one day pull off the bandaid as carefully as possible as to not cause any harm whatsoever – but it will still sting.
I made a video yesterday with my thoughts on just how absurd the entire charade has become.
Mark Cuban Caught In A Rug Pull
If you thought rug pulls were only for DeFi degenerates who don't understand the value proposition of Bitcoin and Ethereum, think again. Famous investor Mark Cuban just found himself in the middle of TITAN's gnarly rug pull, which appears to have lost between 99% and 100% of its value. Yield farmers were honing in on the token as it pumped like mad. LunarCRUSH even had it ranked #9 a few days ago in popularity. Other social listening platforms also had TITAN ranked in the top 10 in popularity prior to its crash, and some users claimed its liquidity reached $2b. The moral of the story here is that anyone who is yield farming or buying random coins can get caught in these pulls, so just be careful!
Side note - it is truly incredible to see Mark Cuban in the weeds with the crypto community, engaging in Discord groups and on Twitter and putting his money where his mouth is.
The SEC Wants Your Opinion On A Bitcoin ETF
The deadline to approve or deny the VanEck Bitcoin ETF just lapsed, but instead of making a decision, the SEC has sought the public’s opinion on the ETF and has postponed once again. While the announcement does sound hopeful, the SEC seeking public opinions has never made a difference in the past. The last time the SEC asked for public opinions, I randomly clicked through the submissions and was very impressed. Of course, this did not change the outcome. I went digging through some older news around Bitcoin ETFs and VanEck and found that the SEC made the same decision in September of 2018 for VanEck’s Bitcoin ETF. This is just an old trick in their book - delay, delay, delay.
If you are passionate about Bitcoin, I urge you to submit your thoughts to the SEC. Their request included 5 long response multi-part questions regarding whether a “Bitcoin ETF would be susceptible to manipulation and designed to prevent fraudulent and manipulative acts and practices.” I plan to randomly look through the comments and document them in this letter. The amount of effort anonymous writers have submitted in the past is truly inspiring.
Binance Is Removing A Few Trading Pairs
No comment was released as to why, but the following trading pairs are being removed from Binance at 12:00 PM UTC: BAT/USDC, FRONT/ETH, HOT/BRL, RENBTC/ETH, TRX/AUD.
Republican Party Will Accept Crypto Donations
The National Republican Congressional Committee (NRCC) will begin accepting crypto donations as a policy, which has never happened with a political party before. This is yet another move towards mainstream adoption.
The Wolf Of All Streets Podcast Ft. Duncan & Griffin Cock Foster
Despite only experiencing its first major hype cycle this year, the concept of NFTs has been around for many years, with NFT projects first starting to appear in 2017. Major NFT marketplace Nifty Gateway founders, Duncan and Griffin Cock Foster have turned an idea into an NFT platform that is ready to onboard 1 billion users. Their early insight into the NFT sector matured them into two extremely successful visionary entrepreneurs, eventually leading to Gemini and the Winklevoss twins acquiring the Nifty platform. If you own an NFT, want to purchase an NFT, or are interested in learning more, this jam-packed episode is an extremely important stop on your digital collectible journey.
In this episode the Nifty Gateway Co-Founders explore:
The 10x Improvement Theory
Being acquired by the Winklevoss twins
1 billion people buying NFTs
The allure of collecting
NFT hype in 2017
Physical art vs digital art
“Fiat is violence, taxation is theft”
Digital art advisory firms
Secure provenance systems
Crypto Kitties' boom and bust
Why NFTs are on Ethereum
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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. Nothing contained in this e-mail constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.