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How to Spot the Best Opportunities Using Relative Strength
The crypto ecosystem mimics the stock market in several ways. Analysts new to the cryptocurrencies asset class are often surprised to discover that a significant number of small hedge funds and venture capitals are extremely active in this space. This despite the fact that traditional institutional investors currently have only limited access to digital assets. At cryptofundresearch.com you can find a list of more than 800 crypto funds. As is the case with equities funds, crypto funds focus on relative performances, as they search among those assets showing leadership characteristics. The speculative nature of the crypto assets implies a very quick rotation of capital from one asset to another.
In the stock market, the rotation of capital mirrors the business cycle, as managers favor specific sectors according to the economic conditions. For those interested in the correlations between the stock market and the business cycle, John Murphy’s cult book Intermarket Technical Analysis is a must, as are Wyckoff Market Discussions each Wednesday afternoon.
How does one spot the main campaign themes in the crypto market? A very technical approach is required. This is a universe still in its infancy where ordinary events like the introduction of new regulations can have a significant impact on the fundamentals. Fortunately, Wyckoffians have an edge when it comes to spotting the rotation of institutional capital in any market. In the chart below we examine the case study of Ethereum, one of the reserve currencies in the crypto ecosystem, a currency that has outperformed Bitcoin during the 2015-2017 market cycle, with unbelievable 363000% returns in just two years.
At the bottom of the chart, we see the Ethereum/Bitcoin ratio. Look how the initial leadership deteriorates during the long reaccumulation range starting in March 2016. Leadership assets usually underperform the market during consolidation periods. After a local decrease of demand, signature at (2), the trend pauses. The CHoCh exhibits bullish characteristics: the reaction is very shallow compared to the big run to $20 and shows a decreasing volume signature (3). After heavy selling off the top of the range and a ST as a spring in phase B, supply deteriorates(4), and locally increases in phase C. It’s a textbook reaccumulation.
Look at the ETHBTC ratio: the break of the downsloping range marked in red, along with the SOS rally on the vertical chart, indicates the rotation of institutional capital from Bitcoin to Ethereum in March 2017. It’s a powerful signal announcing the resumption of the leadership. One of the factors of the leadership of Ethereum in the previous market cycle has been its role as the main reserve currency of the ICO ecosystem. a role that today is in the process of being replaced by Exchange tokens like BNB, Huobi Token and LEO. What is the technical position of Ethereum in the current market? We will examine it in the next blog. Stay in touch!