Bitcoin Is Deeply Oversold. Does That Mean the Bottom Is In? - Bits + Bips

Hi everyone. Welcome to another edition of Bits and Bips the Interview. I'm your host Steve Erlick, and I'm here today with Katie Stockton, founder at Fairlead Strategies, an independent research firm and ETF fund manager. We're going to talk about everything happening in the crypto markets. We're going to digest the blood bath and talk about what's going to happen next. So, welcome Katie.

Welcome back. Actually, you're a good guest.

It's good to be back.

I always look to someone like you in times like this where there's so much volatility. People are watching the charts every minute, every hour, every second wondering what's going to happen next. It seems like there's times like this where the macro narratives matter, but there's so many technical signals that people need to pay attention to to understand key areas of support, resistance, etc. There's no one better than you to distill all that for our readers so that they know how to trade and manage their investments moving forward.

We're going to get into all of that, but before we do, a quick disclaimer. As always, nothing on this show is intended to be financial or investment advice. Please see unchained.com/bitsandbbits for more information and disclosures.

So welcome Katie. Let's get right into it. I want to level set as I always do when I bring you on to just explain your unique approach to analyzing crypto markets. You're a technical analyst and that means you look at price charts in a very particular way. So, could you just briefly explain for anyone that has not heard your previous interviews with me what you do and how you do it?

Of course. It's good to be back with you despite the circumstances with this so-called crypto winter. As a technical analyst, I do look at price trends and price is our primary and in some cases even sole input. We're trying to understand the nature of the trend, whether the trend still has good momentum, whether it's likely to reverse, whether it's in the midst of a counter trend move.

Technical analysis and the indicators that are part of the discipline can help us take out some of the guesswork that's involved in trading and investing and certainly can help take out some of the emotions that are inherent to it as well because it's to us just math. We're looking at these price inputs to try to get a takeaway and just put more probabilities in our favor as we invest.

The likes of Bitcoin and cryptocurrencies have been lending themselves, I'd say, very well to technical analysis in that they are very mindful of levels, support and resistance levels, which are key areas of buying pressure and selling pressure on the charts. I think that's in part because there's so many people watching these key levels in part, but also because they're traded globally and with a lot of liquidity for the bigger coins of course.

With that you tend to get this nice clean chart where there's no gaps or anything to worry about like you have in say a small cap equity. We are very adherent to the charts when it comes to cryptocurrencies and we're just trying to keep these trends on our side.

That's great and in this discussion we'll talk about what the charts are seeing. We'll also discuss some of the broader macro forces and themes that are driving all of this as well. But in times like this it really seems like the data matters.

A question I ask you all the time, I won't ask you to answer it again, but given crypto's somewhat constricted history, is there really enough to do technical analysis? You've said time and time again that even though it doesn't go back decades or centuries like traditional assets, it tends to compress entire market cycles into very short periods of time. So it lends itself very well to what you do.

Yeah. So let's get right into it. You have a chart of Bitcoin up here as we're talking. I think it's dropped below 70,000, dropped to as low as 66 something, down 8% on the day so far. People are running for the exits. They're trying to figure out what's going to happen next. So, I know you also just put out a report on this. What are you seeing on the Bitcoin chart?

Well, the uptrend that we could draw back to the 2022 low has certainly reversed itself and that's become very clear on the chart. More recently, we had a breakdown below a key support level that we were watching, which is based on the shaded area that you see on the chart here. The shaded area represents the Ichimoku model, which is a technical model that's designed to gauge the primary trend and then also potential support and resistance.

Very popular internationally, this model, and it's derived from midpoints of price. So, it is price-based. We saw the bottom boundary of the so-called cloud taken out and that was affirmation that we have seen a bearish reversal in Bitcoin well before we saw that breakdown below the cloud which was just shy of 89,000.

We did see a very meaningful loss of long-term upside momentum. I can show you that from the monthly chart which I'll bring over to the screen here. On the monthly bar chart of Bitcoin, our indicators started to deteriorate months ago. You can see that in this MACD indicator that stands for moving average convergence divergence.

The MACD flipped to a sell signal a few months ago and has been pointing lower and diverging. That means that the downdraft has growing momentum. It's the opposite of what you want to see if you are bullish on Bitcoin.

We have a downtrend underway and the stochastic oscillator that we watch as well which is an overbought oversold metric really only just now reached oversold territory. If you look at historical periods when it got oversold it took months and even at times more than just months to get out of that oversold condition with some kind of major bottom.

The last time that did occur was back here. This was in early 23 that we saw an advance from a long-term oversold condition. So, that's the kind of thing that we want to see now, now that we know that this is a bearish cycle and we want to see some reaction to that long-term oversold condition before we reassert a long-term Bitcoin position.

It's not to say that within that framework we won't have opportunities to trade Bitcoin even counter trend from a shorter term perspective because as you mentioned we do see these volatility sort of or volatile pushes both to the upside and downside and they occur very quickly and that in a way is opportunity. It makes things a bit more difficult but then of course the charts can help make it a little bit easier to trade that.

What are some of the indicators that you look to to sort of be opportunistic on the back of a tactical bounce?

We use a combination of indicators. So it's not just one particular indicator that gives us that signal. But it's the combination and more weighted the evidence as with any discipline is better. If you had an oversold condition that you were looking for and then you wanted to see that oversold enhanced by improved momentum, we have ways to go about that.

I'll give an example. In this weekly bar chart of Bitcoin, we have an oversold reading in the weekly stochastic oscillator, and it's what we call an oversold retest. That actually tends to be a pretty good indication of intermediate term lows.

Before you want to step in front of that oversold or try to catch the falling knife so to speak, it's good to see momentum shift enough to suggest that it's ready to see an oversold bounce or to rebound from that low. To that end, we're looking at shorter term gauges. So we go from our weekly bar chart to the daily bar chart.

We'll look at the same indicators. We'll look at the stochastic oscillator. We'll look at the MACD indicator. We look at something called the Demar indicators which are a third-party service that we use to gauge trend exhaustion. It's those things combined with support and resistance levels and also some traditional means like moving averages and the cloud model that I mentioned.

Those things can all come together in a way that will give you, I guess, conviction in re-entering a position or perhaps taking down your exposure ahead of what we've seen.

The Demar indicators, I'll show you what they look like.

What are they saying right now? The question on everyone's mind is like are we going to see a brief rebound or at what point can we call the bottom?

We have sentiment data as well for Bitcoin and the sentiment data is pretty extremely bearish and that provides a potential contrarian takeaway. So, we do have a backdrop from a sentiment perspective that would be conducive to a low. That makes us look out for these signs of downside exhaustion.

The Demar indicators are almost in no man's land in terms of sending a signal. They're not negative necessarily. They're not positive right now. The last big sell signal we had was right here. You see a 13 on the chart. That was as of October 5th, the week of October 5th. So, it's been some time since we've had a signal from this one particular indicator.

We're not anywhere close to seeing a buy signal that would be countering to that sell signal. We can zoom in on the shorter term time frame. On that time frame, we're a bit closer to at least a short-term counter trend signal, probably no less than a week or two off. We don't like to anticipate these signals, but rather wait for them to actually come and then we re-evaluate the status of our other gauges like those momentum gauges.

It's kind of a weight of the evidence approach and we don't have, in other words, the weight of the evidence right now to give us confidence to add exposure, but we certainly wouldn't be surprised to see some stabilization off of that very extremely bearish sentiment reading that we have looking at the Bitcoin fear and greed index.

That's what I was going to ask because I know in your reports you mentioned the fear and greed index and it's at extremely bearish levels at this point.

That's right. That tends to be something that really only occurs in these kind of emotional climactic low type of environments. So I think we will, in the fairly short term have an opportunity to leverage that oversoul reading. We don't have enough of a trigger quite yet in the momentum gauges.

A couple of other quick follow-ups on Bitcoin and then we'll move on to some other assets. One, when you do see those opportunities for some redeployment or some new deployment, what do you use to sort of gauge how the pace of perhaps this bump or the momentum behind a tactical bounce?

The other thing I'm curious about, I'm sure you've heard, the 70 to 80,000 price range is kind of precarious for Bitcoin. As I'm sure you remember and plenty of people watching and listening, it dramatically Bitcoin dramatically surged through that threshold on the back of Donald Trump being reelected, etc. on pretty thin liquidity and went up into like the 80s 90s over 100,000 which meant that it was just as easy to kind of fall back because there wasn't that liquidity back stop. It was never created to begin with.

If we're looking at a potential tactical bounce, is there a possibility that because of this thin liquidity that we could see a surge that's more than five or six% perhaps a little higher just because of some of the structural the structural setup of crypto markets?

Well, the easy answer is yes because you can see, you know, five, six% moves in a day and then some.

Yeah, fair enough.

I think it's a good question because it talks about more the character of the trend and these moves can be pretty dramatic and what happens and this goes for not just Bitcoin or cryptocurrencies but really anything when you get these steep runups like we saw as an example here in late 24. They don't leave much support in their wake because they're kind of straight up. You get the support from consolidation phases like the one that preceded that runup in late 24.

That's in fact why in part we think there's some support around this current level in this kind of 70,000 area. I'd also add that we never look at support as a precise point but rather sort of an area because there's just too many market participants to make it precise.

So with this consolidation that's where you can get some really good support and of course on the upside resistance. I think your question is in part well when we see a bounce because there's it's gone kind of straight down that leaves not a lot of resistance in its wake until you get back up into the consolidation. So, I think it's a completely fair observation that a bounce could be very dramatic in the same way that the downdraft was dramatic.

It's pretty common in fact to see tests of support give way to dramatic rebounds. You almost want to be there if you are long in the very early stages of that rebound because that first move off the low is often the biggest move. It's hard to time that as you could imagine though because you're if you're waiting for the momentum to shift sometimes you're adding exposure a little bit late to take advantage of that first push higher.

Indeed if you have these sharp down moves to retrace then there is a lack of resistance in the wake of that down move. So I think it's a good point. Notice also on the chart of Bitcoin, there's a character to it where it has these sharp runups and then kind of plateaus for a while. So, it does have the ability to almost maybe move into a basine phase to go more sideways.

It's not always as volatile of course as it is at this moment. It changes character at times and that can be related to any number of things. You know a macro cycle, it could be political headlines, whatever it may be, but that volatility that it has its own cycles in a way.

That's a good point and it's nobody wants to catch the falling knife, but you don't want to wait too long either. So okay, so let's talk about ETH. What are you seeing there? I know that you drew a few interesting contrasts between the setups for Bitcoin and ETH over like the short to long term. You make the case that Bitcoin is better set up right now, but ETH is poised to outperform into the future. So yeah, kind of please talk us through what you're seeing there.

Of course. The ratio of the two is pretty interesting. It does favor ETH over the long long term. When you have a riskoff type of environment like we have had then that tends to be better for Bitcoin versus ETH because Bitcoin is seen often as the sort of more steady bell weather you know it's a little bit more widely accepted lower beta perhaps versus Ether. So, it's natural to see that Bitcoin outperformance and you carry that over to just ETH and broader altcoins in general versus Bitcoin.

The longer term trend does indeed favor ETH and that to me in a way preserves the potential for the secular bull trend to resurface. We are seeing this as a cyclical down move, not a secular bearish reversal. So that would be one positive long long-term takeaway from that.

When we look at the long-term chart, so the monthly bar chart of Ether, you can see it's been a bit more rangebound overall than Bitcoin. It has generally stayed directionally in sync over the short to intermediate term time frames. The resulting impact of the downdraft on our indicators of course is negative of late and they still point lower on a long-term basis.

Like Bitcoin, we don't have any big buy signal to highlight at this time. You can see on this monthly chart there's a long-term gradual uptrend line that we can draw all the way back to a peak in 2019 and it connects previous lows on the chart. This trend line is coming into play around where is this? It's about currently it's about 1527 if we look out a month. So it's pretty well below but I think you know would have to drop another 25% or so to really kind of threaten it unlike unlike Bitcoin which if you we go back to your first chart there I mean it crashed right through the long term.

Yeah. They are certainly capable of that kind of downside volatility before bottoming and that the support levels don't act as magnets really they are more just gauges of potential downside risk. They can give us a sense of the riskreward profile for any given trade.

You can see that the momentum is still obviously to the downside but just like Bitcoin ETH is oversold and you could imagine the sentiment data would translate there as well. It appears just that you know just by the way it looks pretty extended on the downside and like we are doing for Bitcoin we're going to be watching for those signs of downside exhaustion which the soonest they could come is in a week and maybe it'll take another week on top of that to really settle in and maybe see an uptick in momentum.

That's what we're looking out for because of the oversold readings that we do have. So, it's we want the oversold, but we also want the catalyst for this downdraft to mature. It doesn't have to mature closer to that trend line, but at least that trend line is intact to suggest that the secular uptrend is still intact or in force behind the scenes.

What do you think the catalyst looks like? We all remember back in 2022 when FTX collapsed and Bitcoin dropped below 15,000 or so. That was the end of a series of bankruptcies and that are still trying to be resolved to this day and that was really kind of the bottom following out following out falling out, excuse me. But that was also spectacular. That became worldwide news because of Sam Anman Freed and everything associated with his particular company.

Maybe this is the right time to just talk a little bit about some of the macro trends because there are a bunch of them and they seem to kind of be mostly all bearish in a way. It's hard to talk about Bitcoin without sort of it kind of has the worst it's taking on like the worst properties of all of its comparisons. It's not acting like gold even though it's supposed to be digital gold and it's not trading like a tech stock. Except maybe the software ones that are are crashing because of fears about AI.

It's like taking on the worst properties of each of its comparisons. That's sort of obviously the antithesis of what it's supposed to be. Whereas when things are going great it has the benefits of being a tech stock and being digital gold. It's issuing both of them.

On top of everything, there's a whole debate about what to make of Kevin Walsh and his I guess expected ascendancy to Fed chairman notwithstanding whatever happens with Jerome Pal and the legal investigation into him and everything associated with that. Like I mean what are you seeing? I know this isn't directly what you focus on, but you obviously follow the news and are on the news quite often and you hear from your clients. I mean how does all that fit into this?

I mean it's probably when I think about the risk assets broadly, cryptocurrencies are pretty much at the extreme. They're I think among the first to get penalized when people are nervous. So there's some of that going on in that, we're seeing downdrafts unfold as well in the equity market, in precious metals even. So there are downdrafts underway in other risk assets.

Gold, as much as it's known to be safe haven, you know, it has not been acting that way. It's been very much almost like parabolic in its uptrend until very recently. It seems to be maybe instilled by some of the recent news, you know, on the macro front. The charts won't ever tell you why something is happening. You can just see the response and that's what's more important to us is how did Bitcoin respond to Worsh and where is sentiment at the time and what did it do to price? Did it lead to a breakdown which the answer is yes.

There is a lot of I'd say speculation out there about how the DATs you know the treasury companies the risk is heightened for them of course with this downdraft and all of the leverage that's out there. So, I understand where the fears are coming from and then it just becomes a matter of at what point is it overdone in terms of the impact on price and that's what we try to navigate through these technical indicators which they're not going to tell us what's going to relieve the market of this bearish sentiment but they will at least put more probabilities in our favor and knowing that we can at least get a trade out of it on a counter trend basis.

It will likely be a harder year when investors have been shaken by this kind of downdraft and that probably goes for other risk assets as well. For gold as an example, gold has some signs of upside exhaustion that of course now.

You would have to think so at this point, right?

It's not a sell signal that we're terribly worried about long term, but it does give you a sense of perhaps gold entering more of either a much more gradual uptrend or trading range, something of that nature. This is a monthly chart of gold that I've pulled up and you can see the parabolic nature of the up move. You can see also there's a sell signal per those Demar indicators. The first overbought downtrend that we've had since the early stages of that cyclical up move. So there there's enough of it which began two years ago it seems like.

It's been a decent amount of time.

That's exactly right. So it's been a very good cycle and Bitcoin had a great cycle too. The markets we know that they do move in trends that they do also have cycles and there there's evidence that the cycles are changing as of this year year to date already. So it may be just an off year for certain trends and then we can ultimately have a great buying opportunity to take advantage of.

That would be the goal is to try to let these things kind of work themselves out and then you can always revisit them when there's just a way to drive like more confidence I'd say from the setup.

No, it makes sense. It seems like just kind of tie a bow and everything and obviously extremely bearish sentiment, bearish charts, but you're not seeing those like those like screaming indicators that we've reached the bottom or this is the time to sell. That applies to both Bitcoin and ETH that we're still a little bit waiting. I guess it depends on what your time time horizon is.

Again, not financial advice, but if you're a long-term investor and you're not planning on touching this for 10 or 15 years, I mean, does it really matter if you buy at 60,000 or 50,000? Probably not. But if you are more someone that's that's trying to generate some short-term gains, that does matter, especially given as you said, oftentimes the first move is the biggest one and you need to get that right.

Yeah. If I think you bring up a really good point if you are very long-term and have that luxury, right, to not worry about it, I still think that secular uptrend is intact. So you're well served generally by staying with a position if you have that kind of 10 15year time frame but then you know there is opportunity in the volatility to take advantage of the swings.

It is a good asset class for traders and I understand why it everybody's out there looking for opportunities because when you have days where you can get you know gains and losses of 8% plus like this that's opportunity right to take advantage of and to take advantage of it from more of a trend following perspective rather than actually you know making a bet on the fundamental prospect effects of Bitcoin. You're really just trying to take advantage of the volatility more than anything else.

Gotcha. That makes sense. I also want to spend a little time talking about alts beyond ETH. I know you spent time on that in your report, but one of the big themes that we've seen for the last year year and a half has been like the broader I think rotation out of alts and that's not even withstanding sort of the the flight to quality that Bitcoin can sometimes represent just because altcoins in general the development the usage of them has not quite been commensurate with some of the hype and expectations as people in the crypto community have moved into things like prediction markets or meme coins or other things as ways to sort of try to generate additional alpha and some of these alts especially outside of like the top couple ones the XRPS sales BNB Tron have have started to struggle.

Let's talk about that. I mean kind of what are you seeing in terms of of alts?

The directional bias is usually the same as Bitcoin, right? But you can find opportunities from a relative strength perspective. That's why in our research, we publish a weekly cryptocurrency compass note. In that report, we have a rotational graph of the top 10 altcoins versus Bitcoin because there are rotations that can beformational. They can tell you perhaps where the fundamental trends are strongest. You know where there's maybe sort of a hot space that you could take advantage of or you know the flip side of that right and when something's been run up too far too fast.

The relative strength work can be reallyformational on the altcoin level versus Bitcoin. I'd say in general like we have an asset class here that maintains a positive correlation in absolute terms. We have limited price history for a lot of the altcoins as you'd imagine, but this is Salana for one and you can see the downtrend is very much in sync with what we're seeing from Bitcoin.

What I also have found is that they tend to bottom right around the same time and top right around the same time. So I don't think you have to do too much work in a way from a bottomup technical perspective that you can spend the most time understanding Bitcoin and that can inform your bias and your trading for the the smaller coins, right? Because you can kind of trust that even though they don't have the same amount of price history and therein you can't maybe get the the good long-term moving averages and indicators that you want, you can maybe trust that it's pretty similar to Bitcoin.

I think using Bitcoin as sort of the top down proxy for these smaller coins is the way to go at least for now. That could change. We could see more dispersion and in dispersion there's also opportunity but otherwise we we do like looking for relative strength and we have seen you know to some degree the it's almost like high beta versus low beta where you see in downdrafts it's almost always you know the high beta are going to underperform in that environment but they're also going to be the ones that you know sort of accelerate more quickly off the lows.

If you are looking to time the bottom, it might be worth sourcing some of the altcoins because they could snap back in a more fierce manner, albeit holding more risk.

This might be a bit of a historical question. I know we have about five minutes left, so we'll we'll start to wrap up soon. But timing, I mean, you mentioned how some of the alts tend to bottom out around the same time as Bitcoin. Higher volatility, movements up, down, but do you at least going back into the past, I mean, do you see movements happening before some of the majors, especially if they're going up? Is there anything that could kind of just help viewers, listeners, kind of get a better sense of what to look for if they're really trying to be opportunistic?

I think it's the rotational work. I do think that you can see some leading indications in ratio. If you are interested in a particular segment right of the cryptocurrency market to take that and develop maybe a basket or an index from the the coins that you're most interested in and look at them relative to Bitcoin and sometimes you'll see the ratio start to turn before price turns, right? Like you'll start to see almost some accumulation under the surface through the ratio that then manifests itself in a price turnaround.

That could be one way people can leverage that work is using the ratios of the various altcoins relative to Bitcoin to look for that kind of uptick which does sometimes lead price. Most technical indicators like any other discipline are lagging. They're they're going to have a lag to them that's inherent to the way they're designed using moving averages or whatever it might be. That's okay. That's sort of by design. It's obviously historical prices that we're working with.

They can help us eliminate some of the noise, right? And understand if something's a more meaningful or tradable type of turning point or vice versa. So that you know ability to smooth out some of the noise I think should be welcome and can help you stay on the right side of a trend.

Gotcha. Okay. So let's start to wrap up here. I tried to fit in as many questions as I could in the time I had you, but I am curious if there are if there's like one or two questions that you get from clients regularly that I didn't have a chance to ask you.

Lately it changes as the markets change, right? Lately my questions have centered around silver as you can imagine and around software folks looking for that counter trend opportunity in the same way that they are now for cryptocurrencies. Those are the the bulk of our questions lately and I think reasonably so. You know, people sort of gravitate to where there's volatility or that's where they might need more input or advice.

With silver, with gold, with the pullback that we have seen, which is pretty dramatic, especially for something that didn't really previously have that character of going parabolic, our answers have been maybe not not as welcome as as the inquirers intended, but you know, the pullbacks do look like the start of this kind of newer cycle, right? Now you know if we take that out to software well then that will be hopefully to the flip side right so that first oversold bounce I think will instill you know it'll help us understand where there is support for these names and we'll be able to evaluate the sector in a in a good way off of that first oversold bounce because you can see which names are participating and exhibiting leadership off of that first bounce. There can be real information in that type of move.

Those are the types of questions we're getting and it's part and parcel with the VIX finally sort of advancing from this consolidation that it's you know sort of mired within. That increased volatility does in a way increase demand for technical analysis.

Well, I think it was Mark Andre who who wrote software is eating the world and now it seems like AI is eating software. So, I guess that's one way to put it with that. Anyway, Katie, thank you so much for joining us. We'll have to have you back. Yeah, thank you to everybody for watching and listening. Stay tuned because up next, Lars Shin will speak with David Capri on ERC 804 and how AI Agents are interacting with the Ethereum ecosystem.