August 3, 2022
Cryptocurrencies: Weekly Update
The past month of market activity has rewarded diligent traders, with crypto traders outperforming the stock market thanks to the inherent volatility of digital currencies. Of course, the rally in cryptocurrencies has been riding the wave created by the Nasdaq QQQ, which has been steadily outperforming other major stock indices since early July.
As the more speculative QQQ has rallied as much as 18% from its June 16th low, Ethereum and other more speculative cryptocurrencies have rallied by nearly 70% or more over the same period. Meanwhile, the more value-oriented SPY has only rallied 13.5% and BTC only 22% since mid-June.
Clearly, when there is increased demand for more speculative sectors in the stock market, there is likely to be a strong outperformance in cryptocurrencies as they are one of the riskiest asset classes around. We’ve also seen this play out in the stock market with several members of Mish’s Modern Family like Biotech (IBB), Transportation (IYT), and Semiconductors (SMH) leading the recent rally.
Ethereum is clearly leading relative to Bitcoin, while several of the smaller and riskier cryptocurrencies have even outperformed ETH, likely due to the anticipated trickle-down effects of the upcoming Ethereum merge/upgrade to Proof-of-Stake.
Our own CryptoPulse Quant (CPQ) strategy has been taking advantage of this short-term rally by taking trades in some of the more speculative plays in the cryptocurrency market, including Layer 2 coins Polygon (MATIC) and Uniswap (UNI). Our belief is that with the cheaper fees and higher throughput that are promised to arrive with Ethereum’s upcoming upgrade, the use cases for applications built on Ethereum’s Layer 1 will increase as services like Uniswap and Polygon will be cheaper and easier to use.
Of course, there are several other reasons why popular networks like MATIC would outperform during a bear market rally, such as the projects’ growing number of partnerships with established brands/companies and increasing Web3 offerings.
Our trades in MATIC and UNI have locked in 80% and 40% profits respectively since the CPQ strategy entered the positions on July 11th, bringing our Year-to-Date performance to the positive 14.5% mark after an extended period in a defensive cash position.
As it stands, MATIC and UNI both still have drastically stronger Trend Strength Indicator scores (TSI) than any other cryptocurrency in our list of tradable assets, showing extended strength relative to the rest of the market.
The question now is whether or not these more peripheral altcoins will continue to lead the cryptocurrency market upwards on the back of Ethereum’s anticipated POS merge, or if the excitement will fizzle out as we get closer to the actual network upgrade date.
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Despite the improvements across both stock and crypto markets, we’re still not sure that we’ve seen enough to say markets have actually bottomed.
In order for smaller altcoins to outperform, Ethereum typically needs to lead the charge in some way or another. The past month or so has seen ETH break out of its recent consolidation range and create higher highs on both price and momentum, according to RealMotion.
As it stands, the long-term RealMotion indicator (top) is consolidating right at resistance at its 200-day moving average, so depending on which direction momentum goes from here may signal whether you should keep participating in the current rally or consider going back to cash.
In order for ETH to continue its upwards trajectory, it will need to see price close above the May/June range lows at $1727.
Bitcoin is a different story, having lagged ETH the whole past month and still failing to break out of its ascending channel.
Obviously, it's a good thing that BTC is back above its 50-day moving average on price, but in order to really impress us, it's going to need to break out of its parallel range and test the $28,650 level. We’re still calling this a bear market rally and not a true bottom until Bitcoin breaks $28,650.
The ETH/BTC pair improved the past two weeks and has cleared its 200-day moving average by quite a bit now. A move higher implies that ETH will continue outpacing BTC on a relative basis, and there is clear resistance at 0.072399 from the April/May range low.
Polygon still looks strong technically, especially with momentum according to RealMotion having overcome the 200-day moving average for the time being, typically an indication of an imminent continuation in positive price action.
The short and mid-term positive trends shown above are still very much alive for MATIC, but if price continues to rollover below these levels, then it may be time to consider lightening up on any position you may have.
Uniswap also looks like it is ready to run more, having only recently overtaken its 200-day moving average after breaking out from a month-long parallel trading range.
Both price and momentum look to have gotten briefly overbought on UNI, but it looks like price may have already finished mean reverting and could be ready for another leg up with a potential golden cross looking possible in the near future.
All things considered, one must acknowledge that in order for cryptocurrencies to continue their rally, we’re going to need to see a continued improvement in stocks. So far, the crypto market still looks healthy as far as technical analysis is concerned, but the overarching macroeconomic uncertainty and political drama throughout the globe must not be ignored.
It still feels like we’re currently in the middle of a counter-trend rally and not a true market bottom, there are simply too many outliers and variables that are weighing on global economies. Keep your stops tight and trade with caution, we don’t want to give back the gains we’ve made over the past few weeks!
Check out our new CryptoPulse Twitter account @MGCryptoPulse for daily tweets and updates about the crypto space!