The crypto market plunged sharply last week after a disappointing inflation print from the U.S. Additionally, although successful, the Ethereum Merge manifested itself as a sell-the-news type of event. 

This week, the markets are again on the back-foot because of the upcoming Federal Market Open Committee meeting, where the Fed will announce September’s rate hike percentage. Since global assets have been closely tied to Fed’s policies over the last two years, sellers will likely dominate in case of tighter policies. 

The August consumer price inflation (CPI) index of the U.S. was hotter than expected, around 8.3% versus 8.1%. The surprisingly higher print caused a sudden repricing of global assets, wiping out the much-fought gains in equities and the crypto market in September. 

As the week progressed, the downside pressure remained on risk-on assets as the Fed’s Funds Rate began pricing in a 19% chance of a mammoth 100-basis point hike in September.

Additionally, a sell-off in ETH after the Merge added to the downside over the weekend. The reason for the price slump was dominant selling by arbitrageurs waiting for the Merge to grab an additional ETHW (Ethereum PoW) airdrop.

This week, the futures opening prices of stocks, commodities, and the dollar point towards the apprehension of more downside due to a high rate hike announcement. Traders also remain cautious of another big crypto sell-off after the Fed’s decision.

Fed Prime Time

The Federal Reserve will deliver its policy rate decision on Wednesday. The market has 90% confidence in a 75 basis point hike, which threatens further correction in risk-on assets.

As always, the policy statement will be critical in providing clues for further rate hikes. The risk is that the United States housing market will start experiencing issues if rates continue to be hiked at the current pace.

The Fed will also release its rate projections for future meetings. This will be something that market watchers will scrutinize closely. The buying sentiments could revive if the Federal Reserve is willing to slow down on tightening.

However, the American central bank is in a tight spot, and curbing inflation appears to be at the top of their priority list. I suspect the crypto and stock markets will continue to sell off as hiking rates in a low-growth environment remain a nightmare scenario for risk-on asset classes.

Economic calendar for this week. Source: Forexlive

Gold Watch

While Bitcoin and gold prices remained uncorrelated for much of 2022, their relationship with the U.S. dollar could be a canary in the coal mine for the crypto market. Historically, in times of uncertainty, cash and (albeit to a lesser extent) gold have been king.

Non-yielding gold usually sells off when rising dollar interest rates make the precious metal less attractive in investors’ eyes. The yellow metal recently broke below a critical technical support level of $1,680 per ounce, which suggests that gold will move into a much lower price range.

I suspect the move lower is in anticipation of a much stronger U.S. dollar. This has implications for Bitcoin because if gold is sinking on a stronger dollar, then crypto could be due to another leg lower.

Suppose gold sellers take out the critical support at $1,680 with conviction. In that case, it will make sense to look at significant technical closes for Bitcoin, which could trigger liquidations and stop losses in the futures market.

Based on the current futures data, I expect that if BTC breaks below the yearly low of $17,600, it could quickly fall towards the $16,000 and possibly even the $15,000 area.

Spot Gold weekly price chart. Source: Trading View.

On-Chain Bottom Indicators 

As the macro environment continues to add selling pressure, the hopes of a bullish accumulation around the $20,000 price level are fading quickly. The on-chain data reveals that the market has entered the final phase of bottom formation with the likelihood of another capitulation event.

The Spent Output Profit Ratio indicator measures the ratio between the price at which BTC is moved from address against the amount deposited—essentially, the price sold divided by the purchase price.

Naturally, when the selling price exceeds the buy price, the ratio is less than one and vice versa. Bitcoin’s SOPR turned bearish in April at around $37,000-$38,000. Until the buyers push the price above this level, the chances of the return of a bullish trend are low.

At the same time, the lowest reading for the indicator this year was 0.99, which is higher than the previous bottom level of 0.98. It suggests more pain lies ahead to reach comparable bottom levels.

The 30-day average of Bitcoin’s spent output profit ratio. Source: Glassnode

While SOPR measures the ratio of realized on-chain losses/profit, the Unrealized Profit and Loss indicator (NUPL) helps identify the status of active spot positions. 

In the previous two cycles, the 30-day average NUPL ratio dipped to negative 0.25. The indicator again points towards more downside pain, comparing the previous bottom levels.

Unrealized Profit and Loss ratio. Source: Glassnode

The red color of the NUPL indicator suggests that the market has entered the capitulation phase. Unless we see a recovery back to hope (orange) territory, there could be more downside pain ahead. The selling could extend towards $15,000 to reach 2018 bottom levels on the NUPL indicator.

Bitcoin Hopium Ending

Last week’s steep reversal from the $22,700 shouldn’t have surprised readers of this weekly newsletter. As mentioned before, the move was a perfect technical retest of the price area from which Bitcoin collapsed in August.

A case can still be made for a temporary rebound if bears lack sufficient firepower to close the weekly candle below $19,000. However, the odds are certainly stacked in favor of bears, given the likely outcome of the upcoming Fed meeting.

Sellers should have free reign if the price closes multiple days below the monthly low of $19,500. The recent monthly low of $18,500 will be a pivotal support level. My bearish targets remain between $16,400 to $12,400 this quarter.

On the contrary, trying to anticipate how high BTC could rebound is undoubtedly tricky. I suspect the first bullish objective will be $20,800. Nevertheless, I don’t expect any recoveries to go any higher than $21,700.

BTC/USD Weekly chart. Source: Trading View

Ethereum’s Failure to launch

Ethereum is not likely to stage a post-Merge rally unless the broader crypto market recovers. Traders who expected Ethereum to sell off after the Merge benefited from the price action, as the ETH/USD pair fell below the monthly low of $1,485.

The technicals are pretty straightforward. Sellers will remain focused on defending the former all-time high from 2017, around $1,420. If buyers can conquer this pivotal level, the bullish target is around $1,700. 

However, a few daily closes below the $1,420 support level will make things shaky for ETH. If that happens, I would not be surprised to see a rapid move back to $1,000.

ETH/USD Weekly chart. Source: Trading View

More on Total Market Capitalization 

Whether intentionally or unintentionally, the crypto total market capitalization chart often offers excellent clues about the broader market play. Things still look pretty bearish from that perspective.

As I mentioned last week, this chart had layers of bearish volume divergences during its recent run higher. The nasty volume divergence was reversed and devoured in real-time during the crash led by the CPI print.

Some bullish divergence has formed on the lower time frame, which could take the price back towards $1 trillion. It also makes sense that the crypto market capitalization revisits this important psychological number.

Nevertheless, I expect we may not see the $1 trillion level for a while now, and the next big leg lower has started or will start in the not-too-distant future. Worryingly, looking at patterns and long-term divergence alone, I can see the possibility of a 50% correction also exists. You heard it here first.

Crypto Total Market Capitalization Weekly chart. Source: Trading View

What to expect

While I am nervous about being on the same side of the trade as Jim Cramer, things look overwhelmingly bearish for crypto. Especially after the recent CPI numbers from the U.S. economy.

A case can be made for one more rally towards the $21,000 or even higher, although it’s tough to identify a bullish catalyst that could push BTC that high now. 

Possibly some hopium if the Federal Reserve talks about softening in future rate hikes or a surprising crypto-related announcement could serve as a positive market mover. But it is a long shot.

I believe the market is headed lower, much lower, in fact. Rallies are likely to be sold in crypto for the foreseeable future.