After plunging more than 15% during the past three days, has now rebounded. So is the selloff over? For a variety of reasons, we don’t think so.
The cryptocurrency joined other risk assets such as stocks in a sharp selloff as China’s giant real estate group Evergrande (HK:) looked to be on the verge of defaulting. At the same time, , a classic safe haven asset, gained 1.5%. In our view, this puts a damper on the claim by many that Bitcoin could be a stand-in for the yellow metal during periods of risk-off.
From a risk perspective, now that China’s PBoC has started pumping liquidly into the country’s financial system to avoid market turmoil after a holiday, investors might be encouraged that the local regulators wouldn’t allow Evergrande to become another Lehman Brothers. That’s not a forgone conclusion, since recently China has been desperate to counter excessive speculation in various markets, and the Evergrande debacle is blocking its way.
It remains uncertain still whether Beijing will ultimately let the company—its second largest real estate developer by revenue—collapse, in order to send a clear message to other highly leveraged local companies. As such, an additional boost to market sentiment today, and risk assets overall, was Evergrande’s private negotiations with bondholders to pay the September coupon, keeping a default at arm’s length.
On Wednesday, at time of writing, Bitcoin is up 3.8%, moving higher in tandem with regional stocks and US futures. The cryptocurrency found support by the $40,000 key level.
So, why are we not recommending investors buy on this dip? The technical picture is worth a thousand words.
At this point, the digital token’s rise is considered nothing more than a return move to retest a completed H&S top, presumably fueled by short-covering.
Moreover, if the price continues to fall below $28,890, it will have established a long-term downtrend.
Trading Strategies – Short Position Setup
Conservative traders should wait for the price to retest the neckline’s integrity, followed by selling that would push the price below $40,000 on a closing basis before going short.
Moderate traders would also wait on a short, with resistance of the H&S top on a closing basis at the very least. Right now, the price we’re seeing is only on an intraday basis.
Aggressive traders could short right now, provided they accept the higher risk proportionate to the higher reward that goes along with a move before the rest of the market.
- Entry: $42,400
- Stop-Loss: $43,400
- Risk: $1,000
- Target: $37,400
- Reward: $5,000
- Risk:Reward Ratio: 1:5