Market Red Pill – Why Fundamentals and Technical Indicators Don’t Matter

I will be covering a lot of topics in this post in no particular order. It is meant as a follow-up/sequel to my previous post where I discussed the importance of understanding the Market Cycle and Trend Analysis. If your primary objective with cryptocurrency is to make money, then continue reading. If you are here for the technology or too busy to actively manage positions, then do your regular DCA and close Reddit.

TLDR: Cryptocurrency has become another speculation vehicle for institutions around the world. This is why it is more important than ever to learn how to read a price chart. Yes, most of Technical Analysis (TA) is hindsight 20/20. The real value in studying TA is learning how to identify signals/patterns in real-time. This way you can react in the present. You won’t have anywhere near 75% accuracy, but you will most certainly avoid blowing up your account. That’s a win. Your financial decisions will be grounded in reason. That is far from gambling and, therefore, also a win.

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Why should I listen to you?
Some of the recent ‘Analysis’ posts in this sub are discussing:
1) Hypothetical gains if certain coins return to ATH
2) Why the weekly RSI being at all-time lows means it is a good time to buy
3) Creating an algo to find coins with 20x potential
4) Abnormal volume signaling a bottom is in (when in fact it was just people exploiting no-fee trading on Binance)

No offence to any of those authors, but investing/trading in the markets is not that oversimplified. It involves much more study, analysis, understanding, and experience. That means learning to think for yourself and not following some social media furu/influencer who makes decisions for you. Everybody needs to take responsibility for their own financial outcomes. I learned this the hard way and hope that others avoid making the same mistakes I did in the past.

I come from the school of thought that not all Technical Analysis is created equally. The most important concepts are related to price action, market psychology, and supply/demand. Everything else is open to interpretation and a matter of opinion. Below is a Canadian income tax stock slip for one of my trading accounts. It shows that I cycled nearly 1 million shares with a dollar value of $55m. Am I a whale? Certainly not. Do I put my money where my mouth is? I try my best to.

T5008 Statement of Securities Transactions

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Institutions Move Markets
Whether you like it or not, Crypto is being actively traded by institutions whose sole purpose is to extract money from the markets. That means firms, hedge funds, prop desks, market makers, and algos from all around the world are hitting the bid and ask 24 hours a day. Why does that matter? Well, because Bitcoin is viewed as just another tradable instrument at the risky end of the spectrum (high beta). Speculators are making money from price movements in both directions. And they are employing the same techniques used to trade stocks, forex, and commodities for the last century. Here are some recent events which demonstrate how institutions are driving moves in both Stocks and Crypto.

$SPY – Technical patterns with fundamental narrative

A. Price breached over Feb double top for the first higher-high of 2022
B. Pullback pattern failure: stops taken out overnight on April 6 gap (trap!)
C. May 4/5 FOMC FOMO Fakeout: Market rallied into Close then gapped down next morning. Fooled many to go long with a false sense of security (institutions dumped onto retail)
D. Afternoon of June 9: Market sells off before next morning’s CPI print. ‘Smart money’ was getting out after technical support broke (8-day consolidation base)
E. Inflation comes in hot at 8.6% and leads to multi-day sell-off, complete with professional gaps

$BTC – Mirroring stocks above via technical/fundamental drivers

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Learn How to Ride the Tide with the Whales
‘Whales’ profit from buying low and selling high (or shorting high and covering lower). It helps to view the market through the same lens of the actors who drive it, no? Most people who believe TA is ‘astrology for men’ have never traded a day in their life. They liken trading to gambling: random bets with random outcomes. So explain to me how firms on Wall Street have been in business for decades.

If you believe that the billions of dollars that flow in/out of global markets daily are driven by ‘hunches’, then I have a bridge to sell you. To think that institutions blindly decide when to initiate their buy/sell programs is ridiculous. Wall Street prefers that retail brush off TA as witchcraft in order to fleece Main Street in both directions. That’s how they are profitable year after year, in all market environments.

So why does it matter that institutions use TA when deciding to trade/invest in a particular asset? Because that herd mentality is what causes markets to enter uptrends and downtrends. When the big players are in agreement on direction, that leads to fluidity. Clean price action forms patterns. Patterns are predictable. And the market loves consistency. This concept applies to Bitcoin, wheat, stocks, bonds, gold, alt coins, pork bellies–anything that is exchanged on an open market can be charted. Where there’s a trend, there’s a Market Cycle; the Psychology Cheat Sheet is indeed universal.

Emotional stages of a Market Cycle

Somebody once said that candlesticks and volume are the footprints of money. The bigger the volume, the larger the shoes. If you plan to involve yourself in a market, it only makes sense to understand what the shepherds–who guide the flock–are doing. And I don’t mean Ecuador buying 80 Bitcoin the other day. That’s less volume than the prior 1-minute candle on Binance!. I mean the institutional money that created the bottom wick at $17.6k a few weeks ago. The same institutions who defended price at $18.6k to put the brakes on the intermediate downtrend.

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Fundamentals are the Real Fugazi
How many times have you turned on CNBC to hear talking heads opine about which assets to buy vs. sell. They are either late to the party or flat out wrong in their predictions. Putting buy ratings at the top of market cycles, screaming discount during sell-offs, and finally downgrading at the bottom. It’s comical but should be criminal.

And you wonder why retail traders are notorious for buying high and selling low. Here’s an example of how institutions sold Tesla’s last earnings despite great numbers. Following the failed breakout in mid-March, that left a lot of trapped longs above $1100. Many were underwater for a couple of weeks hoping for a bounce. When price returned to their break-even, they sold. It’s been downtrending ever since.

$TSLA April 21, 2022 Earnings – ‘Good’ fundamentals used to trap Bulls into becoming exit liquidity

Any news, upgrade, downgrade, or macro event that is worth acting upon by institutions will reflect themselves in the charts. Bullish news? Show me the big green candlestick with above average volume. Bearish news? Then the market better be selling. If the piece of fundamental information didn’t drive market participants to buy/sell, then it is utterly meaningless. At the end of the day, ticks on the tape are what matters. This is why I tune out forecasts, models, predictions, ratings, and news in general. Focus on the chart and cut out the middleman. The candlesticks will tell you how the market is reacting, not some guest analyst on a financial podcast.

Just for kicks, here’s another one where Bill Ackman (CEO of hedge fund Pershing Square) thought that he could single-handedly halt the downtrend on $NFLX. After dropping 50% from ATH back in January, $350 seemed like a good value, right? It’s down another 50% since then. This from a company that was supposed to be a Blue Chip!

Ackman bets big on $NFLX during a downtrend and loses 36% in just 3 months. Took many retail traders down on the sinking ship.

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Price Action is King
All technical indicators use past price and volume as their inputs. There are countless formulas derived from these two objective measures. Thus, there exists an infinite number of combinations and permutations of indicators, each with a dizzying amount of settings. This is why TA can be subjective and often lagging.

Just because some oscillator has a value of x, or an index is currently at y, it means nothing unless the market acts upon it. A sloping trendline can be drawn numerous ways; Bollinger bands and MACD have many settings. Which moving averages to use? The Ichimoku Cloud covers the chart to the point where its unreadable. Spaghetti lines. Halving dates. Puell Multiples, S2F models. Dominance percentages, Pi-Cycle Bottom Indicators. Do you see where I’m going with this? These indicators are a function of price and volume, not vice versa. No wonder Technical Analysis has gotten such a bad wrap. There is no such thing as a Holy Grail despite how many people claim to have one for sale.

Let’s discuss the objective aspects of a chart. Price is registered when real buying/selling occurred. Fact. Volume is how many units were exchanged. Fact. When displayed on a chart in the form of candlesticks, they paint the picture of supply and demand. These two forces are what drives a market. Fact. Again, it makes sense to cut out the middleman and focus on price action: what the market has done and is doing.

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Trend Analysis Refresher and Recap
So institutions drive the market and their actions can be seen by looking at prior and current candlesticks. Still with me? Good. Go to my last post for a crash course on pivots and trend structure. Everything beyond here won’t make sense without a basic understanding of the Market Cycle.

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At the end of each impulse/retracement leg there lies an area where price reversed. That inflection point is called a pivot. It takes a lot of buying/selling to halt and reverse price like that. This means institutional money. What do you think happens when price comes back to that area again? Many things are possible, including:
1. People who recently bought/sold are back at break-even
2. Traders get a second chance to add at the same price
3. Bagholders can minimize their loss after being underwater on a wrong bet
4. Price is deemed to be a good value after retracing a certain percentage
5. Anyone who exited too early and missed out are able to FOMO back in
6. Etc. etc.

There are entire book chapters that cover the emotions and psychology behind pivots and trends. I won’t get into it here, but it explains the why: the reason that active trends tend to continue and why support/resistance areas are often respected. It’s like the market has a collective memory when a prior price is revisited. Professional traders put their faith into these concepts. The more who act, the more likely these patterns come to fruition.

Uptrend: Forces of Demand are greater than forces of Supply

Downtrend: Forces of Supply are greater than forces of Demand

Sideways: At the upper/lower bounds of a range, forces of Supply equal forces of Demand and causes price to retrace

Ever notice how the absolute top/bottom is only realized in hindsight? It is an inflection point which ended up being the apex of a trend. This is why it is nearly impossible to buy at the very lows and sell at the very highs. The trend is your friend: please don’t fight it.

In the last post I stated that retail has no problem buying during a Stage 2 uptrend. The issue is that they fail to sell during a Stage 4 downtrend. Believe me, the HODL mentality predates Crypto by centuries: Bitcoin just popularized it into a meme. Here are some graphics I dug up which demonstrate this phenomenon in the context of a Market Cycle.

The Market Cycle – Playing the Stages incorrectly due to lack of understanding

Uptrends and downtrends exist because institutions are buying during Stage 2 and selling during Stage 4 (correct areas). The active trend continues until they stop doing this. Remember: institutions move markets. Herd mentality. Our little buy/sell orders have no impact on the price.

Pattern Based Trading
By now you probably realized that I am a believer of price action and trends. This simplifies my actions down to 3 general strategies:
1. During a Stage 2: buy the Pullbacks and Breakouts
2. During a Stage 4: sell the Rallies and Breakdowns
3. During Stage 1/3: wait patiently for the range to be broken and get onboard the ensuing trend

Do these patterns work 100% of the time? No! When they do work is the potential profit greater than the amount risked? Yes! These two sentences are the key to successful trading. Let’s leave that topic for another day.

Each pattern/setup has many requirements which improve their reliability. For educational purposes, here are a few examples which are relevant. By studying dead charts, you know what to look for and can better identify the price action in real-time.

The Breakout Failure – Typically signals the end of a Stage 3 Distribution Phase and Beginning of Stage 4 Downtrend. Also known as the Wyckoff Upthrust or Wyckoff Spring.
What: Price breaches a prior high and then fails
Why: Sucks in longs and creates trapped traders. This fuels selling momentum on the way down; panic leading to fear, leading to more panic and fear. Herd mentality.

Textbook Breakout Failure

Bitcoin False Breakout – Week of November 8, 2021. Origin of current Stage 4 downtrend

S&P 500 False Breakout – January 4th, 2022. Origin of current Stage 4 downtrend

The Consolidation Breakout/Breakdown – Typically a continuation pattern in an active Stage 2 or Stage 4
What: Price consolidates sideways after a directional move. Once floor/ceiling of the range is breached, trend resumes
Why: Thin volume as institutions are not interested in dead action. Once stops are taken out at the bottom/top of base, then money pours in/out to ignite the move

Textbook Base Breakout

Bitcoin Base Breakout 5-min Chart – July 7, 2022

Bitcoin Base Breakdown 60-min Chart – June 17, 2022

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When Will Crypto Bottom
If you made it this far then I still have your attention. You are probably wondering when I think $BTC will bottom. The answer to that is: I don’t know and won’t pretend to know. My job is to react and not predict. To wait for confirmation by analyzing new information that the market provides after each candlestick dies and a new one is born.

That being said, price action will give clues as to when a bottom has been put in. I believe that it will occur either one of two ways:

#1. Long drawn out Stage 1 Accumulation phase like we saw in 2019

Textbook Transitional A – Stage 1 into Stage 2 (numbers show potential entry points)

2019 Bottom – With potential entries at 1, 2, 3

#2. Sudden Climactic Reversal like we saw in March 2020 (alongside Stocks)

Vertical Doomsday drop which culminates in capitulation volume. Makes a higher low (HL) and eventually leads to a new uptrend (HH and HL). Stage 4 directly into a Stage 2; enter on any pullback.

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Closing Thoughts
Thank you for reading this far. I hope you enjoyed the post. Crypto is a hobby for me; something to follow when markets are closed on weekends. I have nothing to sell–just trying to share some info/experience with others who are risking their capital to earn a return. The rest is up to you.

Everyone looks like a genius during a Bull Market. Only when the tide goes out do you discover who’s been swimming naked. -Warren Buffet

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Additional Reading
Many have been asking for TA book recommendations. Here are a few that cover all the concepts from the Classical theories (no promo):
–Technical Analysis of the Financial Markets, John J. Murphy
–Trading Tools and Tactics: Reading the Mind of the Market, Greg Capra
–The Art and Science of Technical Analysis, Adam Grimes

Disclaimer: Not financial advice. Do your own due diligence. Only invest with money you can afford to lose. Sold majority $ETH 3863 and $ADA $2.68 at end of 2021 (Stage 3 top). $BTC $39K final exit April 24, 2022 before base breakdown. Crypto account is 100% cash since May.