As I write this, Bitcoin is down almost 25% from its late June highs. President Trump and the US Congress have recently been dismissive of cryptocurrencies while they appear to be organizing a vendetta against Facebook’s Libracoin, and many crypto investors are taking profits while the Bears are in control. After last month’s euphoric rally, everyone is scared.
What this creates is what I’ve heard referred to as “The Principle of Maximum Adversity.” This is the intersection where the inexperienced Retail investor feels the most “heat,” versus the professional sensing the most opportunity. You’ve probably heard those such as Warren Buffett say to “Be fearful when others are greedy. Be greedy when others are fearful.”
But is every pullback a gift? No. There are a couple of different ways that we have to objectively view a pullback that can ultimately mean the difference between massive opportunity and success, vs. the failure of stepping in front of a real Bear that will erase the majority of your capital.
Who Is In Charge?
There is a huge difference between how any financial market operates depending on its overall trend, and which timeframe is trending. I have two main rules to help me evaluate any market condition:
- Larger Timeframes Dominate the Trend, and
- Reversals start from the Inside-Out and Propagate Upwards
What this means is that when you have a larger timeframe trend, such as on the Weekly chart and above, those normally “dominate” every pullback that comes along, as the pullback eventually reverts to the mean back to the uptrend.
And if it IS going to reverse to a downtrend, it will do so from the smaller timeframes first.
And that brings up a very important point. There is a HUGE difference between a “swing” to the upside in a bear market, versus a true TREND on the larger timeframe charts. It’s all about which timeframe is trending, and the larger timeframe uptrends such as weekly chart timeframe and above are very difficult to reverse. And the reversals, when they do occur, are a PROCESS that has to propagate higher, which means that we’ll rarely see a market just crash from the top.
Range Expansion Leads to Range Contraction
When markets really take off to the upside, as they did in mid-June, they will eventually reach a buyer’s exhaustion. Normally this coincides with some “bad news” which causes panic and profit-taking. Markets normally transition from this “range expansion” which pulls the price to new and higher levels…into “range contraction” where the price movement becomes very choppy and difficult to trade. Again, this is very normal and the sign of a balanced, two-way market, however it does not feel like that to the bulls that bought in at the very top. In fact, they might be down 20-50% at the very bottom of the correction which really underscores how volatile crypto can be.
To combat this feeling of panic, your goal should be to accumulate as (or before) the price breaks into the next “range expansion” leg. And this is the difficult part, because the “range contraction” phase feels so negative that your first instinct will be to sit on the sidelines and avoid the battle.
So as long as Bitcoin is in the midst of a Weekly uptrend, then bring on the pullbacks. They represent a “value” entry. These look so easy in the rear-view mirror as you view them weeks later, but can be difficult to take when all the news around you is negative. And this is yet another reason to ignore the chatter and just focus on the price.
In a Bull Market with Weekly Uptrends, a pullback is your friend.