Bitcoin (BTC) and ether (ETH) retreated in Monday trading following a weekend breach of a popular technical indicator.
Bitcoin and ether prices surpassed the upper range of their respective Bollinger Band, with the assets trading above $28,000 (bitcoin was more recently trading nearer to $27,900) and $1,795, respectively. BTC’s breach occurred on Sunday, while ETH’s occurred on Friday.
Bollinger Bands measure an asset’s 20-period moving average and subsequently plot two standard deviations above and below the average price.
Since an asset’s price is expected to stay within two standard deviations of its average 98% of the time, a breach of its upper or lower bound is a noteworthy event.
The most recent occurrence for BTC took place over nine consecutive days between Jan. 8 and Jan. 16. Prices increased 23% over the same period and rose an additional 12% in the following 13 days.
ETH had a similar run between Jan. 4 and Jan. 16, with 11 breaches over 13 days, and a 29.7% price increase.
Whether prices will subsequently trend higher, or revert to the 20-day average price will be a key trend to watch in upcoming days Currently, the latter has begun to occur.
Wednesday’s upcoming Federal Open Market Committee (FOMC) rate hike decision could affect prices as well. Investors may be less likely to add exposure this close to potentially market moving news.
Trading volume ahead of the decision will be important for investors to watch. Currently, both BTC and ETH trading volumes have decreased from a week prior, but they remain near their 20-day averages.
Significant declines in volume would imply that investors are waiting on the Fed decision, and subsequent comments from Fed Chair Jerome Powell, before taking a definitive stance.
Correlations begin to shift
In an early sign of how the market is viewing BTC and ETH this week, correlations between the two largest crypto currencies and the U.S. Dollar Index (DXY) are more negative.
The correlation coefficient between BTC and the DXY has moved from -0.25 to -0.70, indicating an increasing inverse relationship between the two. Correlation coefficients range between 1 and -1, with the former indicating a direct pricing relationship, and the latter indicating a completely inverse one.
BTC’s correlation with the tech-heavy Nasdaq composite has increased from 0.33 to 0.50 over the same period.
While a 0.50 correlation is relatively moderate, its trajectory higher is worth monitoring, particularly as the relationship with the DXY is inverting.
A short-term “recoupling” of the relationship between BTC and traditional finance indexes would indicate that the upcoming Fed decision could significantly affect prices.
Bitcoin and ether remain extremely tightly correlated to each other with a coefficient of 0.97.
