Can technical analysis guide you through Bitcoin’s September selloff?

Overview

It has been another rollercoaster-ride week for crypto traders, as the prices of bitcoin plummeted to 8200 levels in less than 24 hours, and major altcoins suffered double-digit losses. While the panic levels of the markets have certainly surged, what does this selloff could tell us about? Meanwhile, technical analysis has been one of the popular ways to predict the price directions of cryptocurrencies, however, what’s the importance of applying statistical trend studies into trading after all? Especially when traders deal with an asset class that is still largely unknown to the mass, and such a situation could make technical analysis particularly crucial.

Fear & Greed

Fear has spread all over the crypto space as the prices of bitcoin nosedived on Wednesday to as low as 7660 before stabilized at around 8300 levels. The Crypto Fear & Greed Index (CFGI) dropped to 15 then 12 (figure 1), which is in the area of “Extreme Fear”, on the second day after the selloff. While “Extreme Fear” can be a sign that investors are too worried, and that could present a buying opportunity, the level of 12 was not lowest and it could go even lower. On August 22, the CFGI dropped to 5 (figure 2) and that’s the lowest in the record. On that day, the prices of BTC plunged from the 10800 levels to around 9800 in a matter of hours.

Figure 1: Fear & Greed Index (Source: Alternative.me)
Figure 1: Fear & Greed Index (Source: Alternative.me)
Figure 2: Crypto Fear & Greed Over Time (Source: Alternative.me)
Figure 2: Crypto Fear & Greed Over Time (Source: Alternative.me)

OKEx’s Long/Short Ratio Raised Red Flags

Although the plunge of the prices of bitcoin seems untraceable, our system has already red-flagged some serious price actions ahead of the selloff.

OKEx’s BTC Long/Short Ratio (figure 3), it shows the ratio of traders across OKEx’s platform with net long vs. net short positions over a given period. When the Ratio goes higher, it indicates that the potential profit of short traders would be higher, and that’s often one of the signs before a selloff could happen. The Ratio surged and stayed at near the level of 2.0 right ahead of the Wednesday selloff. The signal has successfully predicted the selloffs in 11/7 and in early August.

Figure 3: OKEx’s BTC Long/Short Ratio (Source: OKEx)
Figure 3: OKEx’s BTC Long/Short Ratio (Source: OKEx)

BTC Prices: Short-term Bearish; Long-term Bullish

OKEx Technicals is still cautioned on the short-term outlook of bitcoin but remains bullish for the long-term. We expect to see more consolidations at the current level after the Wednesday selloff, but we believe the first real support is around the 7,500–8,000 area (figure 3), which is the 38.2% Fibonacci retracement, and the consolidation period back in late May and early June, also that’s where the 200 and 250-day moving averages are located.

Additionally, the RSI may suggest bitcoin has already oversold, however, the Stochastic Oscillator and Ultimate Oscillator are not yet oversold, so that could create rooms for the prices of bitcoin move a little lower, before developing a tread reversal. However, this price corrections could create buying opportunities to position for the next major rally.

Figure 4: BTCUSDT Daily Chart (Source: OKEx; Tradingview)
Figure 4: BTCUSDT Daily Chart (Source: OKEx; Tradingview)

Does Technical Analysis Important at All?

It’s not hard to notice that there were huge among of crypto-related technical analyses on the internet. The fact that short-term or day traders are usually the ones who rely the most on technical analysis, although some of the traders may have misconceptions about its nature and what it can do for them. Most of the traders have been trading in the secondary market, which has always been a zero-sum game. Some new traders find technical analysis useless when they couldn’t profit by employing such practice, however, we shouldn’t neglect the importance of what statistical trend, data, and price information could tell us about, especially when it comes to crypto trading.

Indeed, technical analysis doesn’t work on every kind of asset, but when it comes to some inefficient markets, even part of the emerging markets, and in this case, cryptocurrencies, then technical analysis could be the most effective tool for examining market trends.

Why is that?

When traders need to trade an asset that is still largely unknown to the mass, it’s hard for them to make trade decisions. Prices and charts could be their easy way out, in some cases, that’s the only thing they can rely on to trade. Besides, the exchange of information usually slower in inefficient markets, that could easily create price momentum. We’ve seen many cases in frontier market assets, and sometimes it could happen on crypto trading too.

Think about that, crypto is still largely unknown to the majority although mass adoption has been growing. In some cases, the changes in demand and supply of a cryptocurrency could be based on a collective assessment that all traders make regarding the real or perceived value of that crypto, and that assessment could largely depend on how traders read the charts.

Conclusion

We have reviewed the latest selloff of bitcoin and how OKEx’s data could forecast the price actions of the leading crypto by assessing the trader’s positions. OKEx Technicals remains cautioned on bitcoin’s short-term outlook, but optimistic on for the long run. We’ve also highlighted the importance of technical analysis in crypto, how psychological factors could drive the markets.


Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.


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