Home Ethereum I’m a Crypto Bull, but I see Ethereum falling 80% (technical analysis)

I’m a Crypto Bull, but I see Ethereum falling 80% (technical analysis)

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I’m a Crypto Bull, but I see Ethereum falling 80% (technical analysis)
Ethereum coin and stock chart in the background

Andres Victorero

Ethereum (ETH-USD), for the uninitiated, is the second largest cryptocurrency, just behind Bitcoin (BTC-USD) by market value and role, Ethereum is the primary currency dominating the $100 billion decentralized finance industry (see CoinDesk).

Before I launch into my technical analysis, the reader may want to know my biases: I confess that I am one of the Kool-Aid drinkers who believe that cryptos will be the basis of our economic system in a decade .

I believe that Bitcoin will function as the future hard currency savings instrument (similar to gold so far), while ETH will largely play the role that the dollar plays today. It will be the currency of choice for international transactions.

Over the next decade, I have no doubt that Bitcoin and Ethereum will thrive and be worth 20-50 times their current prices.

So I guess you could call me a crypto bull or – less generously – a crypto jerk.

Despite this, I left all but a small portion of my crypto holdings last January. I thought the Fed’s shifting stance on inflation would cause a market rout where all assets would fall. Crypto assets, having been priced in a market of negative real interest rates, would be the hardest hit.

I was a bit late, but avoided most of the dive that followed.

I know that soon enough the Fed is likely to stop tightening. It’s more a matter of months than years, I think. At some point, it will begin to inflate again.

When that happens, I am confident that fundamental factors will propel both ETH and BTC to all-time highs. My reasoning is beyond the scope of this article, but the bottom line is that we are witnessing the last gasps of a dying global monetary system that has proven its inadequacy. This is becoming more and more obvious to more and more people around the world.

I want to be ready for this reinflation. But when is the right time?

So now I’m going to take out my crystal ball and my astrological charts. Well at least the financial versions of those. I mean of course technical analysis. Let’s see what the future of crypto holds.

When I started my professional career in finance, I thought logic would prevail. management studies, product and service comparisons, spreadsheets, cash flow, etc. I quickly – and rather painfully for my income – discovered that mass psychology was more important in the short to medium term.

In a nutshell, technical analysis takes the pulse of mass investor psychology. It is to assess the degree of madness of the crowds: the fear and greed that drive us to buy and sell assets.

Wait, you tell me. Resistance levels, Fibonacci measurements, RSI – price divergences, etc. do they really work? Aren’t we just drawing random lines on a graph in the hope of discovering obscure relationships that are just not there?

My conclusion after over 14 years of trial and error: technical analysis works most of the time. It’s hard to do right and easy to misinterpret. But that said, technical analysis can give you a valuable edge. I put this advantage at around 70%. It’s not so bad.

Take the Fibonacci levels, for example. Why should they even work? Is it because our senses succumb to an innate sense of proportionality? Is it really because “at the molecular level, the nucleotide spirals of human DNA have Fibonacci proportions”? (source: Fibonacci in humans)

Hmm. Until I measure the angstroms of human DNA under a microscope myself (which probably won’t happen any time soon), I will reserve judgment. Meanwhile, however, those damn Fibonacci levels certainly have a weird way of hitting the mark time and time again with startling accuracy. And of course, sometimes they just don’t.

My theory on Fibonacci measures: the relationship between investment and biology is probably rubbish. But so many stock pickers think Fibonacci levels should work and so they start buying and selling based on those magical proportions. The Fibonacci are therefore a bit like a set of admittedly false rules that most investors choose to follow. They then become self-fulfilling. Good to know where the crowd is going.

Ok, having settled that, let me dive into Ethereum’s longer term chart.

The chart above lets you see price action and a 50 and 100 week RSI indicator on a chart. (More on that below). The second chart is an enlarged version of the first, but only includes price action. This makes it easier to read and follow.

ETH Full Size Technical Weekly Candles Chart

ETH Full Size Technical Weekly Candles Chart (stockcharts.com)

ETH price only weekly candles

ETH price only weekly candles (stockcharts.com)

Take a look at the RSI chart with the 100 period moving average. Please note that if you plot the RSI highs from March to November 2021, you will get a downward sloping line (grey dotted arrow line). During the same period, the price highs have moved to higher highs. This is called bearish divergence. This is very often a sign of a reversal from an uptrend to a downtrend.

So, at the end of May, when ETH made a lower high, it was clear that the slope of the 100 period RSI was negative and a new negative trend was beginning.

At this point, with ETH trading at $2230, you can look for the lowest price reached between March 21 and May 22 and conclude that the price would fall to at least that low, namely $1720. This conclusion is not taught in many RSI discussions, but it is my own learning from extensive use of this indicator for many years.

But by the time it went down to $1720 on May 16, 2022, the RSI100 level had reached an even lower point on the timescale, which was July 2020. At that time, ETH was at a price of around $300.

This suggests that the RSI “wants” the price back to that level. Let’s call this clue #1. (Note that if you ever attempt to plot the RSI, you must ensure that the period you are tracing back to does not exceed the validity of the calendar comparison: for example, a 14-period RSI can only be compared to prices 14 weeks, and so on.)

This level of RSI plotting is interesting, but not enough to continue, so I’m looking for confirmation in other patterns.

Look at the price lows made by both the price and the RSI (dotted red line). We always get lower lows and lower highs. As the price makes lower lows, the RSI plots lower lows. It is in a converging downtrend. Call this clue #2.

Now look at the two red elliptical curves drawn representing two possible bearish price waves, one having already occurred, the other drawn using a Fibonacci-based mirroring of the first. (My ellipses only plot the extremes, not the curling of the regressing waves.)

The first downward red wave formed when the price moved from $4866 to $2160 and then to $3311.

When this wave broke through on the downside (May 9, 22) with above average volume, it was critical. This meant that there was a greater than 90% chance of a second downward wave occurring, proportional to the first.

That’s a minimum of $322. Let’s call this clue #3.

If you want to know where I get this 90% stat, read the italicized section, otherwise skip this explanation.

Take a look at the following chart, which is an idealized version of how Fibonacci waves are supposed to move.

Idealized Fibonacci wave cycle

Idealized Fibonacci wave cycle (Elliotwave Plus)

Note that waves 3 are always a 68% projection of the distance from the origin to wave 1, and waves C are always a 68% projection of the distance from the start of the wave to wave A low, thrown down.

So even if you misread the direction of the prevailing trend (whether up or down), since you just broke through the first defined wave from the last base, you know you are either in a wave C of an otherwise uptrend or in a wave 3 of a downtrend which will have wave 4 and wave 5. Either way, you can count on that 68% projection further in the direction of the wave that has just been crossed.

If your interpretations of the charts were always accurate, you would be able to count on a 100% success rate – according to Fibonacci theory anyway.

But either the Fibonacci theory is a decent but inaccurate way to measure stock movements or my charting skills are lacking. Looking at hundreds of thousands of charts over the past 14 years, I’ve only been successful with these projections (on first wave breaches, mind you) only about 90% of the time. About 10% of eThe projected wave stops below this 68%.

In the orange box on the chart, you will see the calculations behind the $322 calculation. Remember, according to Fibonacci theory, this is the low low, not the low high. The price could go even lower than $322.

Another chartist might look at volume and pivot points and suggest the decline might end at $662 or $460. I think these two will be rebound points, temporary lows, but the downtrend will continue then, until we get my Fibo projection of $322. This would then satisfy the mirroring model.

So if ETH drops to $322, couldn’t it drop even lower? Perhaps at the RSI trace level mentioned in the #1 $300 index? Yes, that could easily happen.

Note the pivot points formed on heavy volume in the June-July 2019 and February 2020 highs and September-October 2021 lows. These form a broad floor of resistance that is likely to stop any further declines. Call this clue #4.

Many people have called the crypto run a bubble. I would agree. The mania surrounding all things crypto over the past couple of years had many bubbly aspects. Well, the vast majority of bubbles return to the base point from which they first burst.

In the case of ETH, this would be at the base price of $129, reached in March 2020. This would be a 100% decline in value since that time.

Is it possible? Of course, anything is possible. But is it likely? I do not think so. But if ETH hits my expected low of $322, I’ll take another look. The chart will then have moved, and it may then suggest even lower lows.

So, in conclusion, my technical analysis suggests that ETH needs to move from its current level of $1522 to a level of $322. That’s a crushing 80% portfolio. And this prognosis comes from a die-hard believer in the future of crypto.

Don’t shoot the messenger.

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