“Never invest in any idea you can’t illustrate with a crayon.” — Peter Lynch
I love the above quote from Peter Lynch. This hilarious motivational quote reminds us to keep trading simple. If something is too complicated, it means there are more chances of it going wrong.
In my previous article “World’s Shortest(ish) Guide to Trading Cryptocurrency” I discuss the need to keep trading simple and also I suggest in my first point (a) to be on the lookout for price and volume divergence. On my phone, I have an app by FTX (previously known as Blockfolio) that I consider an amazing tool to examine the market and track my portfolio simultaneously. It is available for both Android and Apple phones (please note: a) I in no way profit form recommending this tool and b) it is free to download and use). I have such faith in this tool that for BTC ETF comments requested by the SEC I have used images from this source in parts of my arguments.
Below are two screenshots which illustrate why I believe a bearish divergence is forming:
The above screenshot taken in a ‘3 Month Time Frame’ shows price increasing (Blue Arrow), but the Volume is Decreasing (Red Arrow).
In the ‘One week Time Frame’ we can see the magnitude of this divergence with Price dramatically increasing (Blue Arrow) and Volume decreasing (Red Arrow). This discrepancy between volume and price i.e. a bearish divergence usually signals that fresh capital entering the market is drying up and buying momentum is waning. The above image also illustrates my second point (b) from my previous article on the formation of ‘Double Tops’ which shows rejection as price tries to breach key resistance points.
When we marry this with the Crypto Fear and Greed index:
The above image shows movement from “Extreme Fear” last month to “Neutral” right now, which is a move in trader sentiment towards the “Positive” end of the spectrum.
Looking at the ‘Price Volume Divergence’, ‘Price Rejections’ at Key Levels and the ‘Sentiment Gauge move towards the Positive’, I would strongly suggest heeding Warren Buffets’ advice and “Be fearful when others are greedy and be greedy only when others are fearful”.
If there is one key point I am trying to get across to you by writing this piece is to suggest that you err on the side of caution until a more clear picture emerges. It is also to remember the very important fact that “The market can stay irrational longer than you can stay solvent.” — John Maynard Keynes, (attributed).
Happy Trading Folks!