Just after a better-than-expected U.S. inflation report had left investors in a good mood, Federal Reserve Chair Jerome Powell had to come in and spoil it.
Instead of dwelling on the short-term retreat, investors might be better off focusing on the fact that, however briefly, they got a glimpse this week of a price trend resembling anything remotely bullish. It's something traders haven’t seen or even contemplated since the initial tremors in early November that ultimately led to the collapse of Sam Bankman-Fried’s FTX exchange.
Lingering fears of FTX-related contagion risk still permeate markets, while looming concerns about Binance’s reserves and stability have sprouted as well. Up to this point, bitcoin has performed poorer than normal in December, while leading into traditionally bearish January. Whether concerns about Binance are grounded in legitimacy or rooted in post-FTX fear could be clearer in coming weeks.
In the meantime let’s unpack this week’s move up past $18,000 for the first time since Nov. 10. Does the move have real merit, or is it just a short term relief rally? It could be that – just the mere fact that we're asking the question is a sign for optimism.
Historically, on a seasonal basis, the market is not entering a time of the year of strong performance.
From a price-chart perspective, bitcoin’s roughly $17,900 level moves the asset into a “low volume node” region – possibly indicating the potential for quick price moves.
Volume nodes can be identified as zones on a price chart using the Volume Profile Visible Range tool, showing trading activity by price point. A high volume node represents areas of significant price agreement, which often coincides with slower price movement.
By contrast, low volume nodes represent areas of low activity. Prices have the tendency to move rapidly through these areas until they reach the next area of agreement. An illustration of this can be seen in the 14% decline that took place on Nov 9. Bitcoin has now entered that same space, but to the upside this time around.
The next high volume node appears near $19,100, approximately 7% higher than current prices.
Momentum for bitcoin has jumped 23% since Monday when using the Relative Strength Index (RSI) as a proxy for measurement. The movement from 51 to 63 reflects an uptick in buying pressure while coinciding with an increase in volume.
Now – the macroeconomic picture. Inflation concerns still linger, but they're moving toward less panic-worthy levels.
As expected, on Wednesday, the Federal Reserve increased interest rates by 50 basis points (0.5 percentage point), after four consecutive 75 bps hikes.
Powell's comments indicated that the U.S. central bank is committed to fighting inflation and can’t stop too soon, but that any changes to the underlying economic data will be evaluated.
The tone was hawkish, and the market reacted accordingly.
Bond market yields responded to Fed's comments with increased yields for two-year U.S. Treasurys, which maintains an inverted yield curve when set against its 10-year counterpart.
The increase in short-term interest rates implies questions on short term economic prospects, and expectations for more aggressive Fed interest rate hikes.
As market prices reflect future expectations for an asset’s prospects, the notion that we are a step closer to the end of Fed tightening is a welcome sight, even if that has yet to come into full focus.
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