by Chad Steinglass

Consolidation Period

The rapid rise in crypto asset prices, especially BTC and ETH, out of the September pull back came swiftly in the beginning of October, culminating in a wave of euphoria as the first SEC approved BTC ETF (albeit futures based and not spot based) started trading on October 20th, pushing BTC to fresh all-time highs as money rushed into the new product. Since then, however, the market pulled back a little and has been in a choppy consolidation period, causing many to question if the ETF launch was indeed a true “sell the news” event that marked the end of a bull run in much the way that the Coinbase IPO put in the top in April.

Strong Support and Quick Rebound

Since the initial pull back after the ETF launch the market has been defined by quick isolated gains followed by significant profit taking selling coming in the form of vwaps (value-weighted average prices) that have been ratcheting prices slowly lower in somewhat of a “one step forward, two steps back” fashion. However, each time we’ve fallen back two steps, we have found solid support, albeit slightly lower each time. During the last two weeks, we’ve seen two momentary sharp declines, once on October 28th and again on November 3rd, but unlike in previous parts of the cycle, these large downticks did not cause cascading liquidations or even the slightest bit of panic. They were met with strong support and a quick rebound. And so we have remained in a relatively tight range throughout the last two weeks: any sharp decline is immediately bought, and any sharp rise is met with slow steady selling.

Early Indications

This type of action can lead to significantly reduced volatility, which is exactly what we’ve seen, but also probably can’t last forever. At some point, either the capital waiting to buy any dip or the inventory that long holders want to take profits on may become exhausted. I believe we might start to see that this week, and though it is early, early indications seem to point to the sellers running out of gas before the buyers.

Execution Algorithm

To make this observation, I try to look for patterns in price action that look like vwap orders. This is how large traders and institutions execute trades when they have a significant amount of size to trade, and they want to minimize price impact. Rather than executing the trade all at once, they use an execution algorithm that splits the trade up into hundreds or thousands of small orders and slowly executes those orders over time. The result ends up looking like a very long and slow but steady price trend throughout the day. Unlike quick moves that can come from aggressive traders trying to trade in and out or from retail traders chasing a price as it starts to move, these vwap trades tend to be signals of larger, slower, and stickier money that is positioning for a longer-term trend.

Is Institutional Money Actively Buying?

For the last two weeks, the vwap trades were mostly sellers of strength, profit taking as we hit new all-time highs. However, starting Saturday morning I started to see the first sign of real vwap trades come in from buyers. As I said, it’s still early, but I find the price action Saturday and Sunday to be very encouraging as an indicator that institutional money is actively buying, not just offering support on dips. But also, it’s important to remember that this is the weekend, and I always handicap weekend signals a little relative to any information I might glean from weekday price action. I think that if we see continued strength through the day on Monday, and that strength isn’t immediately countered by more profit taking selling, that we could be looking at the light at the end of this 2 week consolidation tunnel. Crypto traders are an impatient bunch, and two weeks seems like a long time to us, but I think there’s a good chance that we’ll be rewarded for our patience.

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