In this week’s episode:
Risk Management Part I - why you should not follow that dog’s investment advice and pay attention when jumping out of the plane
Trading Opportunities - review of last month’s completed short setups and a closer look at what might happen in May and beyond
Weekly Overview - last week as promised, delivered a good dose of volatility and as we’ve expected a further decline into redness despite J Powell clarifying that FED does not plan to have 75pts int rate hikes, sticking to few more 50pts at least during the next two meetings, but this week’s CPI data might force them to reconsider
Risk Management - Part I
Misunderstood by many traders, or worse of all completely neglected risk management should probably be the most important part of your trading plan. No matter if you are a Day trader, Scalper or long term Investor, you should have a decent idea of risks you are taking holding any assets and potential rewards you can expect to get.
We learn about risk and reward our whole lives, from taking first steps to jumping of a plane with a parachute, usually our understanding of underlying risk is pretty good and if a mistake is made, most of us learn from it and try not to do the same thing again.
Why is it then we do not apply same logic when it comes to managing our investments?
Potentially this is because, if you jump out of the plane and you did not listen to your instructor’s briefing closely you might break a leg on landing and that is almost certain to either make you listen more carefully next time or probably more likely never do this activity again in your life, just to be safe. When it comes to money, if you have invested in a company or digital asset without proper research and you have lost it, you should follow the same logic and either do it properly next time or realize investing in particular asset class is not for you at all. Yet that seems to be quite the opposite and retail investors tend to do same mistakes over and over again, most of the time leading to huge losses and stress.
Maybe if there was a physical pain attached to every bad investment decision caused by taking on too much risk and little to no research done prior, people would learn not to repeat their mistakes.
While different people have different levels of risk tolerance, my first advice is to NEVER BLINDLY FOLLOW OTHER'S ADVICE, even if, or maybe especially if, it is some very popular YouTuber with hundreds of thousands subscribers telling you some XYZ coin/token is the best buy ever right now promising you 100x returns very soon!! If you do not do your own research and you lose money on that investment, there is no way to look back at your decision making process and improve upon it. Instead what most do is complain -“but they said it was a sure thing” - and point fingers at that YouTuber and move on to follow another one, while the decision to take on that risk was solely theirs.
I will go into more details and practical examples in next part, but hopefully you’ll think twice before buying tennis balls next time :)
Trading Opportunities
First I would like to mention two short setups on BTC that I have mentioned in March and late April, as both hit their target price ranges this week.
Hashrate ATH - Short BTC setup
Once again a new ATH gave us an early warning that a stronger sell-off on Bitcoin is coming and once again it did not fail. I’ve marked that as completed as you will see a bit more further down, we are getting close to an oversold position on BTC and it is good not to be greedy, assuming you did play on a short side of Bitcoin.
I will keep you posted if you do not track that chart in case we get a new ATH soon.
Another one that was in play for a bit longer since March 30th, was a bounce off 200DMA on BTC chart, predicting an end to a relief rally (dead cat bounce as some call it) was very near. You can see the original setup and logic behind it here.
I was expecting to see sub 36k before FOMC meeting, but day later is still good in my book ;) Whether you used that high probability setup as a chance to exit your altcoin positions from 2021 or to play a short trade, congrats as these opportunities don’t come that often.
Now you may ask, OK that’s all good, but what should we expect now? Further move down, some sideways action or maybe a bounce back up? Let’s take a look at what I think is a similar place 2018 bear market was in, compared to current situation.
Depending on CPI numbers and reaction to them on equity markets, bond yields etc. I would expect Bitcoin potentially sliding down to 32-33k, before making a slower return up, potentially to revisit 200DMA again (currently at 46k+, by the time this move could unfold most likely not higher than 45k) around mid June/early July.
At the moment this is not a clean short term bullish setup yet, but it is not a bad spot for those planning to DCA into Bitcoin this week, just make sure to leave some funds for our “BUY ZONE”.
Since I am going chart heavy in this newsletter might as well show you this potentially relevant situation formed on USDT dominance hitting over 5% that signified either a proper bull run like in 2021 or at least a short rally like in 2022, worth watching this chart over the coming days.
Another strong, TA based argument in favour of some sort of rally, is the fact Nasdaq have dropped below 30 RSI (11) on Weekly chart, same as early March as seen below.
That oversold situation does not happen often and is usually a good indicator of incoming bullish move, unless… it’s a lead up to a recession and we could be just starting our march downhill similarly to 2008 as shown on below chart.
As scary as it might look, I think we are not yet at that situation in the market, nonetheless there is enough uncertainty globally and everything tells me it is still the early Bear market phase, whether on equities or crypto.
My advice for now, would be to keep your cash ready and if you want to buy Bitcoin or your favourite company stock, DO NOT SPEND ALL YOUR CASH at once as we will see cheaper prices this year.
I will be monitoring the markets closely this week and if I see anything solid forming up, I will share it on Trading View and Twitter.
Weekly overview
In case anyone forgot, war in Ukraine still rages on and Covid is rampant in China. Both will impact everyone in the long term, whether its your electricity bill or your car spare parts or other things manufactured in China. Worth noting Monday is Victory day in Russia with celebrations around the country, some claimed it could even be the day when Russia invades Moldova, either way its worth monitoring what narrative comes out of Kremlin tomorrow. Read more.
CPI data from US will be the key economic event this week, possibly few FED members speaking on Tuesday might also move the market a little bit.
You can see that the consensus is on a lower inflation numbers bar the MoM CPI excluding Food & Energy. It is hard to tell whether market will price in the lower CPI expectation on Mon/Tue with possible relief move into green, or keep going into red going against the “experts”, expecting that we should see higher than 8.1% figure on Wed. Either way what pops up on your screens that day will most likely determine the direction for the rest of the week at least.
In digital assets world, this weekend spurred some conspiracy theorists to claim there was a coordinated attack on UST that led to it losing peg against USD. UST is the most popular algorithmic stablecoin that is closely tied to LUNA token and the loss of a peg on Terra caused a stronger sell off at one point LUNA being down over 20% in just 2 days. You can read a bit more here, but in general this adds more arguments to those claiming Terra ecosystem holds on by a thread and might not be able to keep the UST to USD peg during a prolonged deepening bear market, especially if Do Kwon is forced to sell its recently purchased Bitcoin that was supposed to help keep the fore-mentioned peg and Anchor no longer providing 20% APY.