Flagship cryptocurrency asset, Bitcoin, seems to be defying all known laws of gravity as it rallies back above the $20,000 trading zone, effectively turning resistance to support. This has gotten cryptocurrency enthusiasts excited about the month of October, usually termed, “Uptober,” because the asset and the market have historically performed positively during the month.
The current rally is bringing Bitcoin’s price above a long-term descending trendline that stretches all the way back to April 22 or last November, depending on one’s style of technical analysis. In reality, BTC price simply “consolidated” its way through the trendline by trading in a sideways manner where the price has been range bound between $18,500 and $24,500 for the past 114 days.
This newfound rally has some traders feeling a bit celebratory now that the price trades outside of the descending trendline. However, it is important to note that the rally comes with little to no relevant metrics or macro factors changing, which is not enough to support a bullish point of view for Bitcoin price at the moment.
Macro analysis
- Direction-wise, there has been a significant level of correlation between the cryptocurrency market and the equity market as cryptocurrency assets like Bitcoin and Ether tend to trade in tandem with equities. The recent rally in Bitcoin’s price to close yesterday at $20,365 comes as the Dow, S&P 500 and Nasdaq closed the day with 2% to 3% gains.
- As a reminder, it is important to remember that short-term price action is not necessarily reflective of a more significant trend change. On this, Coin Metrics explained, “Correlations among BTC, ETH, and with the S&P 500 have increased recently as the benchmark index fell in price to 3600, which had not been breached since December of 2020.”
- Despite the rally in stocks and crypto markets, larger fears of global runaway inflation, rising interest rates, and other economic concerns continue to suppress investors’ appetite for interacting with markets, a fact that is clearly reflected in Q3 results.
- Yesterday, the Organization of Petroleum Exporting Countries and its allies, a cartel popularly known as the OPEC+, announced plans to cut oil production by 2 million barrels per day, which is roughly equivalent to 2% of the global oil demand.
- Oil stocks rallied at the announcement, but the White House is likely concerned that the reductions will complicate the Federal Reserve’s fight against inflation and possibly contribute to higher petrol prices. This action by the cartel also increases the likelihood of even steeper interest rate hikes, as the U.S. Fed is expected to do what it takes to ensure inflation is put under control. Steeper interest rate hikes will negatively affect all markets, including the cryptocurrency market.
- While the decision by the cartel could spell an increase in interest rates, another case could be made that the recent job statistics could actually reduce the aggressive interest rate hike approach by the federal reserve. The United States job openings dropped by 1.1 million in August, according to the U.S. Labor Department. The decline was the largest since April 2020 and signaled the U.S. Federal Reserve’s aggressive contractive monetary policy could end sooner than expected.
Technical Analysis
- Bitcoin’s move above $20,000 liquidated $75 million worth of leverage short (bear) positions and it led some traders to predict a potential rally to $28,000. Moustache, a technical analysis trader, explained that the descending channel continues to exert its pressure, but there could be enough strength to test the upper channel trendline at $21,500.
- Monitoring margin and options markets provide excellent insight into how professional traders are positioned. Margin trading allows investors to borrow cryptocurrency to leverage their trading position. For example, one can increase exposure by borrowing stablecoins to buy an additional Bitcoin position. On the other hand, Bitcoin borrowers can only short the cryptocurrency as they bet on its price declining. However, unlike futures contracts, the balance between margin longs and shorts isn’t always matched.
- OKX traders’ margin lending ratio, as a measure, has remained relatively stable, near 12. At the same time, the Bitcoin price jumped 5% since the 3rd of October 2022. Furthermore, the metric remains bullish by favoring stablecoin borrowing by a wide margin. As a result, pro traders have been holding bullish positions.
- To understand whether Bitcoin can sustain the $20,000 support, the 25% delta skew is a telling sign whenever arbitrage desks and market makers are overcharging for upside or downside protection. The indicator compares similar call (buy) and put (sell) options and will turn positive when fear is prevalent because the protective put options premium is higher than risk call options. The skew indicator will move above 12% if traders fear a Bitcoin price crash. On the other hand, generalized excitement reflects a negative 12% skew.
- the 25% delta skew had been above 12% since September 21st, 2022. It did nosedive below that threshold on October 3rd, 2022, suggesting options traders are pricing a similar risk of unexpected pumps or dumps. Whenever this metric stands above 12%, it signals that traders are fearful and reflects a lack of interest in offering downside protection.
- Despite the neutral Bitcoin options indicator, the OKX margin lending rate is currently below 12% and it shows whales and market makers maintaining their bullish bets after the 5% BTC price increase on October 4th, 2022.
What you should know
- Generally, institutional investors like Citi and Goldman Sachs expect volatility in equities markets to continue, and both have revised down their end-of-year targets for the S&P 500, while investors are still predicting a down year in 2023.
- All said inflation remains high across the globe, corporate earnings expectations are being adjusted to the downside, and the Fed appears confidently resolute in its current plans for reducing inflation.
None of these developments are conducive to boosting investors’ risk sentiment and given Bitcoin’s correlation with equities markets and sensitivity to bearish economic news flow, it seems unlikely that BTC breaking through the descending trendline is a sign of a trend change. A more convincing development would be a range break and a series of daily closes above $25,000.
Ultimately, the overall bullish sentiment might have caused Bitcoin to break the $20,000 resistance, but that does not mean professional investors are comfortable at the current price levels.
