Bitcoin risks further decline in the fourth quarter due to the confluence of bearish technical structures and macro uncertainty.
The Bitcoin price is showing weakness after another strong rejection of the $11,000 resistance level. As Bitcoin (BTC) enters the fourth quarter, market sentiment remains generally cautious and neutral.
Bitcoin could face a further setback in Q4 due to several key factors. Over the past three years, every September candle has closed in red. The monthly September candle for 2020 is also on track to close in red, indicating a lack of direction.
From March to August, favourable financial conditions, a low interest rate environment and a multi-billion dollar stimulus package caused Bitcoin and stocks to recover in tandem. In the coming months, due to the US presidential elections in November, the likelihood of a delay in the approval of the stimulus increases. The growing uncertainty surrounding the macroeconomic landscape and financial markets in the United States could put pressure on the BTC.
Traders are generally cautious in the short term and optimistic in the medium to long term. Technical analysts have identified key price levels for the BTC as $9800, $10,700 and $11,800. As long as Bitcoin remains in the $9800 to $10,700 or $10,700 to $11,800 range, low volatility is expected. Therefore, although traders are cautious about Bitcoin’s short term trend, many don’t anticipate a large drop.
As a potential area of interest, traders are considering the $9600 CME gap that forms when the Bitcoin price rises or falls below the Bitcoin futures market price after it closes for the weekend or holiday. The $9,600 gap has not yet been filled, and given the tendency for most of the CME gaps to be filled, the level remains a target.
A short-term bearish structure
Bitcoin’s monthly candle is expected to close below $11,000, which would confirm a red candle for September. In technical analysis, if a new candle closes below the previous candle’s close, it is called a „bearish gulp“.
In addition, the monthly Bitcoin close would come after repeated rejections, as since August 17, BTC has recorded four consecutive lows on the daily chart. The formation of a lower high occurs when the last peak is below the previous one. In this case, Bitcoin reached a peak of $12,468, $12,050, $11,179 and $10,950, respectively.
Bitcoin faces two technical bearish patterns and structures in the monthly and daily charts. Both of these time frames are considered to be high time frames in the technical analysis, which could increase the likelihood of a short-term reversal.
The Bitcoin price briefly broke the $10,800 resistance level on September 28, but a pseudonymous trader known as „Byzantine General“ said that it was most likely a bullish trap. The BTC rose to $10,950 on the major exchanges, but was „embracing“ the resistance level. When the BTC struggles to break out of a key resistance level cleanly, the possibility of a „bullish“ trap is high.
Bitcoin’s recent fall of $10,950 means refusals in the monthly, daily and hourly time frames, as they demonstrate cautious/bullish short term structures. When this coincides with a monthly candlestick close, it could amplify a short term downward trend.
The BTC’s historical fourth quarter performance
The historical performance of BTC suggests a downward trend, as over the past two consecutive quarters, BTC recorded declines of 42.46% and 13.59%, respectively. Given the tendency of BTC to underperform in the last quarter of the previous two years, the likelihood of a slow fourth quarter remains high.
However, after experiencing a halving in 2016, BTC had a positive fourth quarter, recording an increase from $613.98 to $998.33. BTC is currently in a post-halving cycle and if past trends continue, could see a gradual increase over the next 12 months. In the 2016 halving cycle, it took Bitcoin 15 months to reach a $20,000 peak, which has remained at an all-time high.
An Uncertain Financial Market
In the last month, the US stock market has continued to fall due to the COVID-19 pandemic. The concerns surrounding a second wave have been amplified by the lack of stimulus and uncertainty surrounding vaccines. A stimulus package would relieve pressure on the economy and distribute direct checks to individuals, increasing overall market liquidity.
However, Bitcoin, gold, equities and risky assets are entering the fourth quarter without stimulus and with an increase in COVID-19 cases, and due to the November elections, Washington has been in a stimulus impasse. House Democrats are reportedly preparing a $2.4 trillion stimulus proposal with direct payments. It is not known whether it will be approved before the presidential election.
As a result, investor confidence has remained low throughout September. According to Bank of America, investors withdrew $25.8 billion from the stock market last week. This marked the largest one-week exit since June 2019, when fears of a trade war raged. In a note, Bank of America’s strategists cited the lack of clarity on the stimulus as a catalyst for the exits, stating: „With the largest fiscal stimulus behind us and without explicit monetary policy easing it is difficult for policy to catalyze large increases in stocks and credit over the next 6 months given initial valuations“.
Although Bitcoin has become increasingly detached from stocks and has shown more correlation with gold, it is still generally affected by broader financial market sentiment. Speaking to Cointelegraph, Denis Vinokourov, head of research at the Bequant exchange, said that macro and political developments have been driving the cryptosystems:
„Macro and political events have become an increasingly important driver of sentiment in all markets, and digital assets are no exception. The uncertainty surrounding the US elections is expected to cause great volatility. The risks of contagion are considered high, but what is interesting is that the implied volatility for Bitcoin and Ethereum has remained well anchored even in the face of lacklustre spot market price action.
On-chain indicators are positive
Since June, on-chain indicators have continuously indicated an upward trend for Bitcoin. Several on-chain indicators, ranging from whale activity, HODLing activity, direction activity, hash rate and latent supply, point to a healthy build-up phase for Bitcoin.
For example, Glassnode’s technical director, Rafael Schultze-Kraft, cited the „Bitcoin Short Term Holder MVRV“ to suggest that BTC is at a crucial point. He said that the on-chain indicator suggests a trend reversal when it reaches 1. The last time it reached 1 was in March when BTC recovered from a sharp $3,600 correction. Kraft said:
„The #Bitcoin STH-MVRV ratio has been above 1 since April. Currently testing the support line at 1 (indicative of trend reversal) – short term holders are valuing $BTC at its realized price. #Bullish as long as we maintain this level“.
Soona Amhaz, General Partner of Volt Capital, referred to the Bitcoin Blockchain’s management activity to signal a healthy sentiment, saying it indicates substantial user growth. In general, the technical structures point to a short term weakness and a long term accumulation phase. Uncertainty in the financial markets could intensify selling pressure on BTC for the foreseeable future, but on-chain metrics show a healthy and gradual growth rate of the network.