Hope and hype
The crypto market posted significant gains last week, recovering a large portion of losses due to the drop in mid-August. The primary factors that promoted the uptrend were weakness in the U.S. dollar and growing optimism around the Ethereum Merge.
Since last week, other global currencies such as the euro and yen have surged against the dollar. A decline in USD supported the rise in risk assets such as stocks and crypto. At the same time, Ethereum core developers executed the final upgrade before the Merge, building confidence in its successful execution.
This week, the release of the Consumer Price Inflation (CPI) numbers for August on Tuesday and the Merge (expected to take place on September 14) will act as the primary market movers.
The market expects positive news from both fronts: a low CPI print and a successful Merge. These will likely add to the bullish pressure, causing crypto prices to surge higher. Still, the event carries an “unknown” risk of unexpected technical mishaps.
In the medium term, however, the macroeconomic conditions and on-chain movements do not favor a sustainable bull in the coming weeks.
Reasons to be cautious
While the Merge and low CPI expectations are solid reasons to turn bullish on the market, I remain cautious that the current rally could be a bearish retest before further downside.
The reason for my bearish inclination is that very little has changed on the macroeconomic front. The Fed remains hawkish in its intent to curb inflation, and the dollar continues to project more strength in the long term.
As I mentioned last week, my target for the dollar index against other currencies is 114-120. Despite the correction below 110 points on Monday, my target remains unchanged.
Let’s discuss what caused the weakness in the dollar last week. Firstly, Germany announced a 65 million euro relief plan to avert the ongoing energy crisis. Then, the European Central Bank announced a monstrous rate hike on Friday, increasing the euro’s comparative yields against the dollar.
However, I suspect that both these drivers will become ineffective soon. The increase in government spending by European countries will promote inflation. The fact that European countries like Germany are rolling out economic stimuli to take the can for expensive energy bills will hurt the euro’s long-term value.
At the same time, the dollar should rise as the Fed increases interest rates. A primary driver of currency prices is interest rate differentials. Currencies with higher rates tend to outperform those with lower interest rates. It’s because institutions borrow a lower-yielding currency and exchange it for higher yields, thus, capturing the difference in interest rates.
Investors and traders will be keenly watching the CPI report from the United States on Tuesday. Expectations are anchored to the downside after last month’s flat-out reading. Thus, risk assets like Bitcoin could rise with a softer print.
Economic calendar for this week. Source: Forexlive
However, the core CPI, which filters out more volatile food and energy prices, may rise by 0.3 percent month-on-month. The year-on-year core CPI reading is expected to come in around 6%—way above the Fed’s target of 2%, which will continue to pose a threat of aggressive interest hikes.
During his speech last week, the Federal Reserve chairman Powell reiterated hawkish rhetoric. The markets expect a 75 basis point hike in the following policy rate meeting on September 20-21.
Notably, the drop in energy prices also supported the notion of “peak inflation.” However, that too may be temporary as oil demand from China may increase after ends COVID-19 lockdowns eventually, and the situation between Russia-Ukraine is not improving. Overall, the macroeconomic picture projects more upside for dollars and downside for crypto and stocks towards year-end.
The on-chain picture does not support a bullish thesis in the coming weeks. Still, a bullish overshoot is likely due to the market hype.
The two crucial smart money holders of Bitcoin—miners and mid-tier whales (addresses holding 1,000 to 10,000 BTC)—have reduced their balances since mid-August. It suggests that they are expecting lower prices.
The One Hop Supply of miners chart below represents the BTC balances of addresses that received Bitcoin from mining pools. Notably, these wallets added to their balances after the correction in July. However, they resorted to selling again in August.
Bitcoin One Hop miner supply. Source: Coinmetrics.
The mid-tier whales also reduced their holdings significantly in the last two weeks. The fact that smart whales are selling into the current rally is not a good sign.
Bitcoin supply held by holders with 1,000 to 10,000 BTC. Source: Santiment.
Nevertheless, there’s still a chance of an overshoot in the crypto market this week to wipe out the bearish sentiments among traders. The Weighted Sentiment indicator is close to the yearly lows. Usually, negative sentiment within the market results in a contrarian bull run.
The funding rate for perpetual swap futures is also negative, which enables long buyers to hunt the stop liquidations of these orders. Thus, until the market’s perception flips positive, there’s a change of further upside.
Bitcoin’s weighted sentiment indicator. Source: Santiment.
However, without price sensitive whales joining the buyer side, the sustainability of a bull run is questionable.
BTC’s Bearish retest
One thing I have been waiting for is a “bearish retest” of the $22,500 to $22,700 area for some time. This was the area where the Bitcoin price really collapsed when it was broken after its rejection from $25,200 in August.
I think selling around the $21,700 to $22,500 area in expectation of another big price drop over the coming weeks and months is now my number one strategy.
Admittedly, I would like to assess the price action over the coming days to see what happens around the Merge event before entering into a signal too early.
On the flipside, if the price moves much above $23,000 then the potential of a much larger bullish move towards the $28,000 area becomes harder to ignore.
BTC/USD Weekly chart. Source: Trading View
ETH’s Decision time
Ethereum has a huge week ahead as the Merge is just days away, and the price action is starting to look like it may continue to pump the second-largest crypto up until the main event.
There are still chances of unknown errors arising during the Merge on the mainnet, causing a drastic price drop. While the price may surge on successful completion, a sell-the-news type price action is just as likely despite success.
Getting straight to business, I think that bulls need to take out the $2,000 level this week with conviction to see a constructive rally in ETH.
If buyers can conquer the $2,000 level, technicals point to a significant price rally towards the $2,600 to $2,700. However, if the rally fails this week with a move back under the $1,690 level, we could probably expect a price crash towards the $1,420 area.
ETH/USD Weekly chart. Source: Trading View
Total Crypto Market Capitalization in Danger
Attempting to read the crypto total market capitalization has given me some excellent clues over the years as to where the niche market may be headed. Currently, all clues are bearish.
The crypto total market capitalization chart shows that bearish MACD price divergence extends to the $930 billion level and that the current rally will inevitably reverse.
Admittedly, negative price divergence can take some time to reverse, and with this in mind, the risk is that the ongoing rally can still extend higher this week despite the divergence.
Last month I had a target of $1.4 billion, which is back on the table. In mid-August, the market quickly collapsed as Bitcoin faded from $25,200. Nevertheless, if we get a return of significant buying volumes and a breakout in BTC above $23,000.
Crypto Total Market Capitalization. Source: Trading View
The bottom line
Much of what we will likely see this week in market moves is driven by “hype and hope.” The Merge is stemming a lot of hype, but talk of “peak inflation” could also spur market hope for the greenback topping out.
While other currencies may have become more attractive in the short term, it may be too premature to call peak inflation and a top in the dollar. The fact that the Fed is still likely to hike rates fairly aggressively into year-end, and the ongoing Ukraine war still poses a significant threat to risk-on assets like Bitcoin.
Moreover, until we see significant spot buy volumes returning and smart money buying again, the probability that the current upside is another example of a bear market rally is very high.
Nevertheless, dominant negative sentiments and a smooth Merge may promote a substantial upside. With significant volatility and uncertainty expected this week, I’ll wait for the events to pass before taking any positions.