Buy fear and sell greed.
This is a mantra many of us claim to live by but usually struggle to put into practice. How do we tell when the market is objectively fearful or greedy? There are certain indicators like the fear/greed index but it on its own is not a very reliable indicator of tops or bottoms. This kind of timing is very hard to get right, and requires multiple areas of confluence, as well as a clear break in market structure, ideally on high volume.
So what do we see on the BTC price charts and sentiment indicators in these last few weeks? Well, if we want to know if the market is generally overly fearful or greedy, it is always best to correlate several factors to draw that conclusion. Right now, in my opinion we have 3 big, objective ones.
The fear/greed index. Our favourite sentiment indicator has been dropping very hard since the most recent big dump, as well of the 60 day moving average of the index putting in a new all time low. From that perspective, we are very fearful. The high time frame volume spike in this most recent big dump. Any Bitcoin price chart, spot or futures, will show a huge volume spike on this dump below 30k. This indicates many investors selling at a loss as their stop losses get hit, as well as leveraged traders taking short positions as they believe the market will continue to break down. From that perspective, we have most active participants acting bearishly towards the market. These kinds of volume spikes have also historically been classic indicators of a local low for Bitcoin, you can even see another example from April 2021 on the chart.
The long/short ratio on binance futures. Binance futures BTCUSDTPERP pair is the highest volume Bitcoin market of any, and thus very important to observe as a market participant. Binance publishes the ratio of the number of positions that are long vs how many are short. Although the same number of futures contracts must be long as are short, since for every contract shorted there must be a contract longed on the opposite side of the trade, the number of positions that are short can differ from how many are long. E.g. you could have a single trader long on 3 contracts, with two traders on the opposite end taking shorts, one of them shorts 1 contract and the other shorts 2 contracts for 3 total. Here there is one long position and two short positions, i.e. a long/short ratio of 0.5. In practice, the long/short ratio is overwhelmingly between 2 and 3 on Bitcoin, and it rarely drops blow 1. Exactly that happened two days ago, for the first time since March, when we also pumped hard. This is a very strong indicator of overwhelming retail bearishness.
The final point pertains to just seeing how bearish everyone has become on social media, with constant talk about the recession, but this factor is too subjective for a worthy analysis in my opinion.
So clearly we can see that the market is overwhelmingly bearish right now, with multiple areas of confluence confirming this. Now all we need is a break in market structure on high volume. Our three main structures are uptrend, downtrend, and consolidation. These past few weeks we were consolidating, but we’ve broken the range now.
Whenever market sentiment overwhelmingly seems to indicate one thing should happen, and the opposite starts to occur, it is usually a great time to play the direction everyone else is against. This is because disorganized herds of retail traders with differing goals and entry prices can do far less in terms of influencing price action than highly-organized market makers who know they can influence the markets if they play them right. These kinds of divergences in terms of price action vs sentiment make it extremely easy for the market makers to push us in the opposite direction of sentiment due to the positive feedback loop it creates. You sell the bottom and it’s easy to make you FOMO back in when price pumps again, and for shorters they are forced to cover eventually as price moves up and away from their sell price, and with the long/short ratio having dropped this low it seems highly likely this effect will be very strong.
Remember, this phenomenon is far more common than you might expect, and is usually the main driving factor behind significant price moves: greed and fear are human emotions that highly-organized market makers can prey on very efficiently to get the best positions, and they do so perpetually. If you’ve ever set a stop loss and had it just barely get hit before price moves in the opposite direction, now you know why. It usually is not coincidence, these market makers are incentivized to understand and exploit human psychology in order to make money, by knowing where the majority are likely to psychologically place stop losses and moving price into that area in order to take the liquidity when you cover. This is the reason buy fear and sell greed works so damn well when you get it right.
For the reasons outlined above, this is why I believe we have a good chance of continuing this pump for a little while until we retest the key levels at 35k, 38k, 40k and possibly above, until we eventually see everyone get overly bullish again too early, price consolidates and we dump again. I think this is most likely to happen at those levels but I’d be happy to eat my words if we go to 50k or higher.
I hope you found this analysis interesting or helpful, please be sure to disagree and form your own opinions on the market.