BIn the last quarter of 2021, almost every market technician was aware of the clearly defined technical support line that was forming throughout the year in the Russell 2000 Index. Technical Analysis 101 teaches that a support break is a “change in personality,” which carries with it expectations that the trend of New downtrend is in progress. While this view was popular, very few people were aware of the enormous “size gap” and its potential significance that lies below this level. These gaps are measured by plotting historical volume at price levels on the y-axis, also known as ‘volume at price’ or ‘market profile’, rather than the traditional method of charting volume over time on the x-axis. This is a feature that not many people use, which is understandable because it is rarely a meaningful factor on the medium and long-term time frames.
Volume gaps typically form when a security (stocks, bonds, commodities, ETFs, etc.) has an equivalent uptrend across a wide price range, at which time a relatively low amount of volume occurs. Then at some point in the future, when that safety “comes down the other side of the mountain”, so to speak, the low volume price range created from the previous parabolic move often acts as an “air pocket” where it is violent and “gaby” Price movement can occur.
In Russell 2000: Walking A Slippery Slippery (12/3/21), we highlight how historical price action from the fourth quarter of 2020 (+41% in 12 weeks; third best 12-week period ever) sowed the seeds for this not Also a common technical phenomenon, especially for the 2000 stock index. Six weeks later, the Russell 2000 broke the support resulting in its second largest weekly drop (-8.1%) in ten years, with the exception of March 2020. Over the following months, the Russell 2000 traded all the way through the low volume area to drop more than 20% from the previous support level for 8 months.
Russell 2000 ETF (IWM) on January 21, 2022
Volume gaps seem to be more prevalent these days due to the large number of securities that experienced strong relative moves, some parabola, over a relatively short period of time after the historic fiscal and monetary stimulus that injected into the economy at the end of March 2020. In in the spring and summer of 2020 It was the “working from home” stocks that led the sharp rise first. By November, those strong influxes turned into stocks that “reopened” after the US presidential election and three straight Mondays of “better efficacy” results announced by major vaccine makers. Now with the Fed tightening financial conditions, the current volatility in the market can be said to be riled up by an increase in the number of securities, with weak technical support, across relatively wide price ranges.
This brings us to Bitcoin, which is no stranger to parabolic movements. Over the 10 weeks from November 2020 to January 2021, Bitcoin advanced from 13,823 to a then-record high of 38,048, which measures a gain of 204%. Despite advancing another 64% to a high of nearly 69,000 over the next 10 months, January 2021 saw the peak of the weekly RSI (momentum meter), which then reached 95. The last time the weekly RSI was This rally was in 2013 when Bitcoin advanced more than 5,400%.
This shows how intense the progress is over such a short period of time. More importantly, over the next 10 months in 2021, Bitcoin established a clearly defined support level in the 28800-30000 range.
The 28800-30000 range is an important support level, not only because of the large number of times it has been tested and fixed throughout 2021. The most important factor is the previous 8 weeks when Bitcoin gained 105%. This is the critical price range (13,823 – 28,800), where weak support is expected.
For popular indices like the S&P 500, many data platforms use “time at price” because the index itself is not a trading tool. An index’s “time at price” is often a near-inverse of the “volume at price” of its ETFs. Bloomberg uses “time at price” for cryptocurrencies as well. Thus, it is assumed that the ‘Time at Price’ bars on the left y-axis of the below weekly chart will be ‘aligned’ with the ‘Volume at Price’ bars if that data is available.
While Bitcoin has already fallen more than 55% in just under six months, a break of the 28,800 support suggests that a similar percentage drop could occur in a shorter period of time. There is nothing saying that price should fill this lower volume range and, to be precise, there is a larger price history (ie support) down at the 19,500 level. However, with Jerome Powell on Autopilot two more times of 50 basis points during The next two FOMC terms, there is an increased risk that this 15-month support at 28800 does not hold.
In an extreme scenario, if bitcoin hits 13,800, that would measure an 80% drop from its November high. In its recent history, bitcoin has fallen by 71% to its lowest level in 2020, -84% to its lowest level in 2018, and -86% to its lowest level in 2015. This can be a useful guide for those looking to Risk management or “buy the dip”.
The opinions and opinions expressed here are those of the author and do not necessarily reflect the views and opinions of Nasdaq, Inc.