Bitcoin got off to a rocky start last week ahead of the Fed rate decision. A simultaneous decline in the Nasdaq100 index due to poor earnings season and potential 100 basis point (bps) hike from the U.S. central bank added to Bitcoin and the crypto market’s worries. 

However, Bitcoin and the technology stock index staged a solid rebound after the Federal Open Market Committee (FOMC) raised interest rates by 75 bps as widely expected, and hinted at a possible slow down of subsequent rate hikes moving forward.

Powell noted that, “We think it’s time to go to a meeting by meeting basis and not provide clear guidance.” This wait-and-see approach was taken as dovish and acted as the green signal for traders sitting on the sidelines. 

Crypto rallied as the odds of a 75 basis points hike at the September Fed meeting fell to 30% from 52% afterward and the terminal annual rate moved down to 3.31% from 3.38%.

The risk assets further benefited from a softer GDP print from the United States for the second fiscal quarter. According to the technical definition of the word “recession,” the American economy is probably experiencing one right now with two consecutive quarters of negative GDP. However, a likely halt to quantitative tightening by the Fed is causing buyers to dip their toes back in. 

Making Sense of the Moves

The market’s positive reaction to a technical recession confirmation may surprise some investors. It seems absurd if you take the moves at face value.

However, as I have been saying recently, we live in strange times where “bad news is good news,”especially for risk assets like crypto and stocks. Traders and investors are blindly buying now factoring that soft GDP means no big rate hikes from the Fed.

I also wanted to put more color on why Bitcoin moved higher last week—starting with the shake-out at the start of the week, which clearly was a big bear trap.

The week before the Fed meeting, traders who expected a 75 bps hike went long to capture early gains. However, as often is the case, when we see one-side positioning by short-term traders, the price usually moves in the opposite direction. The move accelerates when the liquidation of short-term traders occurs.

Around $150 million in crypto futures had been liquidated during the lead-up to the Fed decision. Data showed that almost 80% of the positions involved were leveraged longs. Things changed with the price dip early in the week as buyers grew apprehensive of the possibility of a 100 bps hike.

This time, the Long/Short ratio took a big dive, indicating that traders were short close to the event. However, after the announcement, large buy orders were spotted on FTX, which squeezed the overly short players.

One other thing that could have helped last week was the negative sentiment. Weighted Social Sentiment data showed an overwhelming bearish bias towards BTC post-Fed announcement. This can be attributed to previous market downturns on rate hikes. However, the negative bias became a contrarian signal. Retail probably got faked out and remained short after significant downside correction on Monday and Tuesday.

Going forward, liquidation level data for 10X leveraged positions on futures exchanges indicates pending liquidations around the $24,500 area. A cascade of liquidations could probably send the price towards $26,000, where it will likely witness a raft of heavy profit taking.

Economic Docket 

The economic docket is focused on jobs and manufacturing data this week. As per the headline of today’s newsletter, “Bad news is good news” will likely be the playbook for this week as well.

According to macro investor Raoul Pal, a positive manufacturing data acts as a leading indicator for increase in the dollar’s M2 money supply, which sits properly with the theory of a dovish Fed. 

The expected print for the number of jobs added in July is low at 250,000; in June, the number was 372,000. If the result is below or around expectations, we should see a continuation of last week’s post-Fed trade, which means higher crypto, and stocks, while the U.S. dollar moves lower as traders price in less aggressive Fed action. On the contrary, better than expected results would have an opposite effect with downside in risk assets and a surge in the dollar.

Economic calendar for this week. Source: Forexlive

On-chain Hurdles

The Spent Output Profit Ratio (SOPR) is a strong hand indicator that measures the realized on-chain profit and loss. The metric pivots around the value of one, where ratios above one suggest that coins are being moved at a profit, and values between zero and one is when coins are moved at loss.

The indicator is also useful in identifying market trends. When the SOPR indicator finds support above one, it usually means that buyers are stepping in during dips, usually exhibiting a price trend of higher highs and higher lows. During a bear trend, the opposite happens, investors are usually selling, thus, when the price recovers, more sellers arrive to exit the market.

The SOPR is the shortest on-chain signal of a trend reversal. Since April this year, the majority of the transactions were in losses. Last week’s recovery led to an increase in SOPR towards one but a failure to break above it kept the bearish trend intact. The price needs to move above the current $23,000-$24,000 resistance zone and build support above it to establish a bullish trend on-chain trend.

Spent Output Profit Ratio (SOPR). Source: Glassnode

Don’t Fight The Tape

A weekly closing above the 200-week moving average (currently at $22,880) sets up a very positive bias for technical traders this week. It gives the much-needed green light to technical traders to buy or add to existing positions.

Traders with experience often like to add to winning positions rather than adding to losing positions at lower levels. I am a big fan of this trading style as it reduces risk, and an uptrend gives you more conviction of upside instead of adding to fading theses.

The price action may present an opportunity to buy the retest of the 200-week moving average. With this in mind, we could see a substantial move higher over the coming weeks as the critical technical barrier is finally broken through, and buyers should start adding to their positions.

Thus, “fighting the tape” or trading against the path of least resistance is probably the exact opposite of what you want to do in the short term. BTC is being scooped up on price dips, setting higher highs. On the downside, a breakdown below $22,880 and the top of the recent range at $22,500 could send the price down to $21,600.

BTC/USD Weekly chart. Source: Trading View

The One To Watch

Ethereum is undoubtedly the “one to watch” this week as the price action for the ETH/USD pair strongly suggests that this coin could be just getting warmed up, and so far, it has led the crypto market’s recent gains.

The Merge news is no market secret, and this positive development is starting to get priced in. Moreover, I feel ETH/USD could still see another 20 to 30 percent upside if BTC heads to the $27,900 resistance level.

ETH can be a strange beast to trade because it can drop steeply before making huge upside moves. Last week, dip-buyers who scooped up ETH/USD around $1,350 made a great trade. 

On the downside, last week’s low of $1,350 should provide support to buyers. A breakdown below this level could see ETH retest the 200-week moving average at $1,230.

Overall, I think the upside case remains solid for Ethereum, and dip-buyers may continue to buy aggressively on any pullbacks this week.

ETH/USD Weekly chart. Source: Trading View

Overlooking Polkadot

As a technical trader, I am hesitant to comment on fundamentals in-depth because it is not my specialty. With that said, it is common knowledge that Polkadot is struggling due to the Ethereum Merge news.

Positive technical development for Ethereum hurts the market opportunity for Polkadot as its competitive advantage lies in technical prowess, which is becoming ineffective. This could be one reason why DOT/USD is not currently rallying because the market is busy pricing a successful Merge, and DOT is on the losing side of this trade.

This is why I am probably not comfortable issuing a Buy signal for DOT/USD right now for Coins On The Move. The risk is just too significant for a downward price move, and if the rest of the market is heading higher while DOT stays subdued, it will become a highly troublesome trade.

DOT/USD Weekly chart. Source: Trading View

Moving Forward

Bitcoin could run towards $26,000 or even $27,900 in the coming weeks. I don’t think now is the time to be bearish.

The only thing that could derail the expected continuation of the move higher is if we see an adverse reaction to geo-political events—a potential military action in the long brewing China-Taiwan conflict, or a drastic worsening of the Monkeypox outbreak. Let’s hope these bearish catalysts don’t play out and erode last week’s good work.

Honestly, I have gone from cautiously bullish to bullish based on the price action and on-chain changes over the past few weeks. In my opinion, this market still wants to head higher.

Being overly bullish or bearish is normally not a good sign for a trader. For me, trading is all about executing low risk and high reward trades when the price action confirms your analysis. You can be wrong more than you are right with this strategy, but with a 1: 4 or 1: 5 trade risk-reward ratio, you can still beat the market quite comfortably each year.