Crypto Market Strength Continues but Don't Get Carried Away

Crypto

Weekly Review

A little over a year ago, Sam Bankman-Fried (SBF) may have been busy tallying his substantial digital coin holdings; however, he now faces the possibility of counting down days in prison. A Manhattan jury reached a unanimous verdict last week, finding the FTX founder guilty of seven counts related to his actions while leading the now-defunct cryptocurrency exchange, which infamously lost around $8 billion in customer funds. SBF's chances of redemption appear exceedingly slim, but for the broader cryptocurrency industry, this turn of events could offer a long-awaited opportunity to move on.

The trial of the former billionaire lasted approximately four weeks, yet it took the jury just over four hours to reach a unanimous guilty verdict. Former colleagues who testified against him revealed how he diverted customer funds from the exchange for personal investments, political contributions, and even charitable donations. His conduct during the trial did little to garner sympathy, with the judge also admonishing him for evasive responses while on the witness stand.

The outrageous circumstances surrounding FTX's collapse deepened the general distrust of the still widely unregulated cryptocurrency sector. Research by digital asset investment firm Galaxy Digital showed that crypto and blockchain startups raised less money in the last four quarters combined than in the first quarter of 2022 when FTX was still thriving. Although the crypto bubble was likely to burst even without SBF. Ironically his significant role in advocating for U.S. legislation to regulate these assets meant that his downfall, at least in some ways, slowed down progress in the sector.

However, despite predictions of cryptocurrency's demise, there is still a market for digital assets. Bitcoin's price has more than doubled this year, and major financial institutions like BlackRock are increasingly interested in legitimizing virtual currencies. Even FTX may be poised for a revival, with CEO John J. Ray III working on a compensation plan for customers who suffered losses. The bankrupt exchange is also in negotiations with three potential buyers to relaunch its trading services, as reported by Bloomberg last month.

Assistant U.S. attorney Nicolas Roos emphasized in his closing statement to the jury, "this is not about complex crypto; it's about deception". Regardless of whether SBF appeals the verdict, his swift conviction should provide a sense of relief to companies using blockchain technology to address real-world issues like cross-border payments and remittances. Crypto enthusiasts argue that the technology allows for the creation of decentralized financial networks, something the traditional U.S. regulations do not necessarily favor, so the ‘fight’ is far from over.

BTC/USD

1-Day Timeframe

Bitcoin has been holding up fairly strongly so far as it has been consolidating in an ascending price channel. While an eventual retest of the previous HTF range high ($31.5k) remains likely, for now focus should be on the daily 8EMA. Price has been retesting and finding support on the 8EMA during times of strength, and unless that relationship changes, we should lean towards more upside. $38.5k - 40k - 43k remain a likely target if we get another impulsive leg up. On the downside $31.5k - 33k looks like a good place to scale in or add to your long exposure if you are bullish based on the chart structure (which I am). Chart structure-wise there is no plausible scenario in which we dip to <$20k or even start closing daily candles <$30k and then rip up from there shortly after. 

ETH/USD

1-Day Timeframe

ETH has been catching up with BTC to some extent. $1,746 was flipped successfully towards the end of October and price has been consolidating in the same ascending price channel fashion as BTC. If BTC does not correct heavily from here, I expect ETH to continue its grind towards $1,940. Ultimat target for now still remains the buy side liquidity above $2,020. If the daily 8EMA support is lost, I would consider looking for long exposure in the daily fair value gap between $1,670 - 1,746

Legacy

Weekly Review

The S&P 500 Index posted its most robust weekly increase in nearly a year, driven by indications of an economic slowdown and a Fed policy statement that was generally seen as cautious, resulting in a significant drop in long-term bond yields. Although growth stocks and the technology-heavy Nasdaq Composite Index outperformed to some extent, the gains were widespread, led by the small-cap Russell 2000 Index, which achieved its most substantial weekly increase since October 2022.

Last week marked the second busiest period of earnings season, and we could observe that market movements were influenced, in part, by institutional investors making trades to recognize tax losses before the fiscal year-end on October 31. Additionally, index rebalancing and portfolio adjustments before the end-of-month holdings disclosure may have played a role.

In addition to corporate earnings, the week brought a flood of policy statements, economic reports, and geopolitical developments for investors to process. A significant factor affecting sentiment appeared to be the Fed's policy meeting that concluded on Wednesday. While the Fed decided to keep interest rates unchanged, as widely anticipated, investors found encouragement in the post-meeting statement, which indicated that the recent rise in long-term Treasury yields had achieved some of the intended tightening in financial conditions. Furthermore, Fed officials seemed comfortable with the recent positive surprises in economic data, making only a minor adjustment to their description of economic growth from "solid" to "strong".

Friday's closely monitored payrolls report appeared to confirm a cooling labor market, with hopes that wage pressures would follow. Employers added 150,000 jobs in October, falling short of expectations and marking the lowest level since June. September's initially strong job gains were revised downward. Concurrently, the unemployment rate increased to 3.9%, reaching its highest point since January 2022.

Average hourly earnings increased by 0.2%, which was below expectations, although September's gain was revised upwards to 0.3%. The 12-month increase in wages dropped to 4.1%, the lowest in over two years, but still considerably exceeding the roughly 3% level that policymakers generally consider consistent with their 2% inflation target. 

Positively, both workers and investors received encouraging news about productivity growth, which exceeded expectations for the quarter, along with a decline in unit labor costs. The 4.7% productivity gain represented the best performance since businesses began reopening in the early stages of the pandemic in the third quarter of 2020.

While I'm skeptical that the road ahead will be entirely trouble-free, the recent correction in the markets and the positive economic data point to a scenario where both growth can continue, and the Federal Reserve can maintain its current pause. Additionally, the seasonally favorable conditions for equities further strengthen my belief that there is a persuasive argument for the markets to regain momentum as we approach the end of 2023 and enter 2024. Let’s have a look at some key levels to monitor on the charts below.

S&P 500 

1-Day Timeframe

After completing the 5-wave correction pattern we have been monitoring for weeks, the S&P 500 Index bounced strongly from around its critical 50% retracement level (measured from ATH to current bear market low, see previous issues of the Trade Letter for reference). Price is nearing the value of wave 4 of the previous 5-wave pattern, we still have to see if the bullishness in the market will continue this week, or if we see a pullback towards $4,200 and then move further up in a typical ABC pattern. By dipping below wave 3 ($4,217) emotional market participants would likely be wrong footed believing that “support could not be established”, just to shortly after get left behind when price enters the C wave in an impulsive manner. Just speculation at this point, but something we can monitor for,

DXY 

1-Day Timeframe

DXY did not push as high as I anticipated before the drop below 105.535. With no major economic data release this week, I would like to monitor the DXY chart and collect a bit more price action data before drawing the next likely scenario.

Weekly Schedule

United States

A number of Federal Reserve officials are set to deliver speeches this week, with Federal Reserve Chair Jerome Powell having appearances on both Wednesday and Thursday. Powell's participation is anticipated in a panel discussion with the topic "Monetary Challenges in a Global Economy" at the Jacques Polak Annual Research Conference in Washington, D.C. 

Retail investors ought to pay keen attention to theremarks and carefully analyze the official statements to gain a better understanding of the central bank's perspective and the probable direction of monetary policy.

If there are any signs that policymakers plan to proceed cautiously and avoid raising interest rates further, it could exert downward pressure on Treasury yields and the U.S. dollar while providing a boost to both stocks, precious metals and potentially crypto. Conversely, if there is a hawkish tone in the commentary, it may produce the opposite impact on these assets.

Eurozone

In Europe, the main economic calendar event is a fireside chat between Ms Lagarde and Martin Wolf on the global economic outlook at Financial Times' Global Boardroom 2023 in London.

Written by: Gunter Lackmann