What the heck is happening in the crypto world? Is Ethereum finally dead? Is ETH taking its last breaths?
Not likey. In fact, the recent pullback on the ETH-USD market is probably one of the best and healthiest things investors and traders could have asked for. Given ether’s 300% price rise in just over a month, this pullback has a left many traders and investors bullish on the ETH-USD market.
On a macro-scale, we can see ETH-USD had a very nice, textbook market correction along the 50% Fibonacci Retracement Line (shown in brown). This test of the 50% line was immediately rejected and is illustrated by the massive spike in volume (shown in blue).
For healthy, growing markets 50% retracements are a very common occurrence, and the market response to the retracement can be viewed as a sort of litmus test for the strength of a market (i.e. a positive rejection of the 50% line with upward price action tends to indicate the market still desires higher prices, and a negative move from the 50% line will typically indicates the market is still extended and thus overvalued).
Figure 1: ETHUSD, GDAX, 12HR Candles
Looking at the micro-trend, we see the strong price rejection bounced off the 50% Fibonacci Retracement Line and is currently in the process of forming what is known as an “Inverse Head and Shoulders” pattern. This pattern gets its name simply because it has the following, easily identifiable characters:
A well defined neckline (shown in yellow)
A break of the descending trend line (shown in brown)
A left shoulder, a head which makes the lowest peak, and a right shoulder
A re-test of the neckline (at the time this image was made, the market was testing the neckline)
Finally, to confirm the reversal pattern, volume usually needs to increase after the re-test of the neckline to gain strength in the upward movement.
Figure 2: ETHUSD, GDAX, 30Min Candles
This sort of pattern is often traded in FOREX and stock markets because it is seen as a reliable and predictable indication of future price movement. Typical price projections for Inverse Head and Shoulders are easily calculated with the following formula:
Price Movement = Price of the Neck Line (~$350) – Price of the Head (~$250) = ~$100
Price Target for Trend = Price Movement + Neck Line Price = $450
Given the strength of the macro-trend’s rejection of the 50% Fibonacci Retracement Line and the current pattern forming on the 1-hour charts, we must then look to other indicators to give us further market insight. Two commonly used momentum indicators, RSI (Relative Strength Index) and the MACD (Moving Average Convergence Divergence), show us that the price increase from the initial, aforementioned 50% Fibonacci Retracement Line rejection is welcomed with a rising trend on both momentum indicators; this shows us that the price growth still has upward momentum.
Although the sudden price drop was a bit terrifying for many investors and traders, it was much needed and has now shown the strong market value of ether.
Now that we have proven the strength in the market, it is very likely we will see new price highs in our future before we see further tests of lower prices.
On a macro level, ETH-USD sentiment still remains bullish; on a micro level, we are seeing strong indications of a trend reversal from the sudden bear market over the past few days.