For now, Ethereum should stay safe from Evergrande news
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The world of cryptocurrency has been everywhere lately. It looked like he was going to turn around at the end of July, but Bitcoin (CCC:BTC-USD), Ethereum (CCC:ETH-USD) and others found some momentum and followed it.
For Ethereum, that meant a 130% rally from lows, as the cryptocurrency broke through the $ 4,000 mark earlier this month. A sharp setback was encountered by buyers, but then the Evergrande (OTCMKTS:EGRNF) news out of China caused cryptocurrencies to sink.
Is the band really exposed to Evergrande?
Evergrande and Cryptos
The stock market had gone through a few difficult weeks before September 20. After several weeks of low volume trading during which the markets stabilized (spending too much time going absolutely nowhere), stocks started to shake. But they were only slightly down in the 20th. Then concerns about the Evergrande group arose, pushing index futures down on Sunday night, then collapsing on Monday, 20.
Why is this important? Because cryptocurrencies have taken the same path, Ethereum included. Although as usual, the group did so with a lot more volatility. From its high on Sunday to its low on Monday, Ethereum fell 20%. It has recovered somewhat since then but remains below the $ 3,000 threshold.
While Evergrande Group doesn’t really have a direct impact on cryptocurrencies (or US stocks for that matter), broader implications are cause for concern. Specifically, it creates concerns about the Chinese economy and the Chinese real estate market.
While some call it China’s ‘Lehman Moment’, I hope it is much more isolated than that. By making it a Lehman moment, it creates systemic risk. When we take care of it, it doesn’t matter Microsoft (NASDAQ:MSFT) or the S&P 500 are not directly affected – or in this case, Ethereum.
What this creates are panic and “risk-free” transactions, and it affects those assets.
I think the news from the Evergrande group was more of an excuse for the market to do what it wanted from the start, which is to go through a slight sell-off. Unless this creates a worsened systemic problem in China, US stocks and cryptocurrencies should not be affected too significantly by this situation.
Click to enlarge
Source: Graphic courtesy of TrendSpider
The situation with Ethereum is a bit trickier. As the S&P 500 fell a few percent, Ethereum fell into a technical bear market.
During Monday’s decline, Ethereum tested and held the $ 2,900 to $ 3,000 zone. It also held the Daily Volume Weighted Average Price (VWAP) measure. A day later, it closed below all of those levels – plus the 21-week moving average.
Ethereum is trying to recover that area now, but it sits below the VWAP metric and weighs in at around $ 2,950. Get back above $ 3,000 and this one will be better. Still, concerns persist.
So far we have an “ABC” correction towards (but not towards) the 200-day moving average. At this week’s low, Ethereum was down more than 30% from highs.
From there, see how it handles the VWAP metric on the upside and the 21-week moving average on the downside. A move above the VWAP and the $ 3,000 level opens the door to the 50-day moving average and the $ 3,350 area. Above that and the September 16 high near $ 3,665 is in play.
The risk with a rally is that Ethereum is preparing for an “ABCDE” correction, which could drop the cryptocurrency below $ 2,500. I know investors don’t like this kind of arbitrary point of view, basically saying that Ethereum could do ‘this or that’. I’m sorry, but that’s how asset prices work. All we can do is follow as best we can.
On the other hand, a move below the 21-week moving average brings into play this week’s low and the 200-day moving average. Below that and $ 2,500 or less could be on the deck.
The bottom line
I realize that I am not talking about Ethereum as a rabid bull in this article. But that’s because short-term price swings can occur regardless of the fundamentals or long-term bullish thesis.
Did the massive sell off of many stocks make sense in March 2020? Clearly not, and the same could be said of Ethereum now. Even if we see $ 1,750 to $ 2,000 again, that doesn’t change the long-term potential of Ethereum.
For now, I will remain a long term bull, but in the short term Ethereum remains a ‘prove it’ asset. Return above $ 3,000 and this one can rally. Below the 21 week moving average and I will look for a deeper drop.
At the time of publication, Bret Kenwell had (directly or indirectly) no position on the titles mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.