In April 2018, John Bollinger asked on Twitter what everyone’s favorite technical indicators are that they’ve mostly come to rely on. Given that many people aspire to be like John Bollinger, in terms of trading at least, we may safely assume that the responses recorded were to a decent extent authentic.
The results were not very surprising - traders generally flock to the same things and are creatures of habit; unless you live under a rock you’ll be well aware that when it comes to crypto trading, the same chart setups get plastered across the whole of cryptotwitter and cryptoreddit. There is nothing wrong with that, on the contrary, it is precisely the reason why basic technical analysis still very often works.
It is certainly possible to tell whether it is time for daring or time for caution
One thing that does go unmissed, however, is that this is not all there is to trading, even though a purely technical approach will often work fine and can certainly bring in good profits. What a purely technical approach completely ignores though, is the overall situation on the markets. Situational factors require a slightly different approach; one that doesn’t need you to change much on the daily, but can save you from FOMO in the crucial moments that often lead to bad decisions being made. These decisions can seem even positive initially if you only considered a technical chart for a cryptocurrency.
While it might be the truth that time in the market beats timing the market, it is certainly possible to tell whether it is time for daring or time for caution. Even if you aren’t a very active trader, it can still make you a good profit during a time when your portfolio would otherwise be in a drawdown. If you are more actively trading, you can consider this as a way to establish the level - the kind of information you are looking for on longer timeframes. Of course to make a trade out of it you will still need to get an actual setup and then wait for a trigger.
Using the crypto indexes
There are many general ideas originating from legacy markets on how to very roughly see where a market is at, and although most of them cannot be directly applied to the cryptocurrency markets, you will find that there is sufficient analogous information available.
When you look up articles about market timing, classical sources will usually mention things like unemployment rates, treasury yield curves, weekly and seasonal cycles and developments in industries that are most sensitive to changes in public psychology (such as entertainment or health industries). These are of course very broad and generic things and while in cryptocurrencies one can too draw broad conclusions from indicators such as transaction rates, the popularity of cryptokitties or attempts to buy bitcoins on credit, it isn’t really something to trade on.
Digging into more technical aspects of the market timing is where it gets interesting, and in order to do that we will investigate something that has finally been established in the crypto markets: reliable basket indexes.
The indexes that have been created for crypto markets were modeled after the legacy ones, with some adjustments - after all, the cryptocurrency market is in its infancy, it is volatile and most of its USD value comes from a single coin. Nonetheless, we now have both market cap weighted indexes that mimic S&P 500 or NASDAQ and a price weighted index that has its closest legacy variant in Japanese Nikkei.
Market cap weighted cryptocurrency indexes
CCI30 - cci30.com
Created by mathematician Igor Rivin and economist Carlo Scevola, CCI30 is an index that contains the usual coins such as BTC, ETH and IOT, but currently also smaller coins like TRON, OMG and Tether. The constituents are weighed by market cap, more specifically it uses an exponentially weighted moving average of the market capitalization. The composition changes each quarter and the weights of contributions monthly. This index is currently used by thecryptosfund.com where you can invest in the basket of cryptocurrencies of CCI30 - currently it outperforms just holding bitcoin.
Crypto20 - crypto20.com
Crypto20 is a byproduct of a tokenized investment fund that trades on the decentralized exchange IDEX under the ticker C20. While you can get the price data programmatically from the IDEX API the data about the composition is only available from the C20 homepage.
Price weighted cryptocurrency indexes
CryptoCompare - cryptocompare.com
CryptoCompare has a landing page detailing a crypto index that uses the VWAP approach (Volume Weighted Average Price) taking into account the past 24 hour volumes. That would be the only price-based crypto index right now - however, the index is not listed in their API.
Other sources worth mentioning
Santiment is a network token of a project that gathers data on all ERC20 projects and is in the business of providing unique information about crypto markets. Very unique data is publicly available at the SANbase, tracking interesting things such as developer activity on Github which you won’t find elsewhere. From the whitepaper, the focus seems to be on gathering crowd sentiment, network activity and also tracking large transactions.
Large cap cryptocurrencies vs small cap cryptocurrencies
There used to be an observation on the crypto markets that when large-cap cryptocurrencies are retracing after an advance, the end of the retrace is often preceded by big gains in small-cap altcoins. Similarly, during a bull run, traders like to close their small-cap altcoin positions first across the board, simply because the rise there is almost entirely based on hype.
In legacy finance the charts are behaving in a similar manner - smaller companies, represented by the Russel index, weaken first as their capital dries up faster.
Cryptomarketsignal gives an overview of cryptocoins with daily and weekly gains split into tables by the market cap size, including data for each market cap segment as a whole. Very nice single-glance information: cryptomarketsignal.com/small-cap/
The gist behind the technical market timing tools is to look for typical trader behavior that is likely to shape the market into a reversal: what is needed is a) a lot of independent participants doing the same thing in different parts of the market so that in consequence the market as a whole is affected, and b) small amount of participants who trade significantly more volume than the rest.
The latter approach is dubbed whale watching in the cryptocurrency space, but it is by no means a new thing. In cryptos we already have various tools for that - orderbook heatmaps, big order sound alerts, large transaction monitoring on the general network, etc. As for the technical analysis approach, the indicator that singles out bulk activity is IIIX.
Looking for the independent participants who may be small but numerous is trickier, and here we’ll investigate if getting this information from the advance, decline contributions of a basket of cryptoassets, is reasonable.
This section is a quick intro into the three selected technical timing tools. Real data tests will be shown below.
Advance - Decline contributions
The Advance/Decline Line is an indicator that you can find on the TradingView library in several versions, however, because it works with a basket index it is not directly useful for cryptocurrencies. The legacy ADL is not completely useless, more on that later, but it is not the same.
The Advance/Decline Line compares advances and declines of constituents of an index over the given timeframe (normally daily). It does not take into account how big the advances or declines are, but rather only measures how many of each there were. This number is then made relative to past values of the index. The actual figures you get from the indicator will depend on your starting point, but the information you are looking for is only a divergence anyway.
What the ADL measures is the overall participation on the markets: As you probably know, eventually during long bull runs, all of the boats get lifted by the tide - it is too late to buy shares of Amazon, but it is early enough to buy other tech companies, bitcoin is too expensive but look at ethereum, litecoin, ripple, tron, vechain…. This quality relies a lot on psychology, which is why it works the same in cryptocurrencies as in legacy markets.
The critical information given by the Advance/Decline Line is the disagreement between the price development and the development of the market participation - a divergence. With ADL, though the full range of momentum divergences would not make sense, it is not a momentum indicator so looking for all kinds of technical divs will give you bogus information.
- A bullish divergence only occurs if the participation is broadening but price is not growing - in other words during accumulations.
- Topping occurs when there is narrowing participation but prices are not declining.
An event very close to the ADL topping is something we have seen in January 2018: Bitcoin started to decline but some other markets were holding up surprisingly well - for example, the ETH/USD market. In the crypto investing circles it became a legitimate question at that time: Will BTC now dump without a bad effect on the alts? Will big altcoins carry on with their extravaganza, leaving the rusty shit-tech bitcoin behind? EthTrader dubbed it the great decoupling but unlike the flippening, the decoupling was not talked about again when ETH eventually corrected to 400 USD a short while later.
From the point of view of the technical timing tools, the decoupling was not a likely turn of events: The market participation in cryptocurrencies was narrowing, some coins were stronger than others but ultimately it was a signal that an overall correction was likely, even inevitable.
Intraday Intensity Index
IIIX or Intraday Intensity Index is the only indicator of the ones mentioned here that will make sense if used on a single cryptocurrency chart. It is available on TradingView in several versions, a good one is this IIIX by KIVANÇ fr3762.
IIIX is a combination of high-low ratios over a given timeframe. The ratios are adjusted so that they supposedly single out the whales: For daily values, IIIX is calculated by subtracting the day’s high and low from double the closing price, divided by the volume and multiplied by the difference between the high and the low.
John Bollinger has advised to use IIIX combined with bbands for confirmations:
- When looking for the bottom, the price should touch the lower bband and IIIX should have positive values.
- When looking for a top, the price should touch the upper bband and IIIX should have negative values.
Breadth Thrust is an old indicator that will undoubtedly need some testing and tweaking to be applied to cryptos. Historically it was used for generating fairly rare and very long-term entry signals ahead of the start of a bull run.
Breadth Thrust is a 10-day moving average of the
advances/(advances+declines) ratio of an index. The information traders look for here is just a single event - the thrust.
In the traditional reading the thrust occurs when the ratio moves from values below 0.4 to values over 0.615 in the span of 10 days (traditionally that is two trading weeks). What that signifies is that after some period of weak participation (which is typical during a bottom range) suddenly the advance in a few select markets pick up very rapidly over short time. In the case of the bottom range, it happens when big enough investors start to rapidly accumulate.
That is good information to know, but it is worth mentioning that big investors buy spot and they don’t mind being a bit too early.
Follow the legacy markets!
Everyone is sick of the classic bubble chart that gets blasted all over the mainstream media whenever the price of bitcoin makes a move in either direction. The truth is that the tech bubble and the bitcoin pop charts are indeed similar - as they should be, because they reflect the market psychology more than anything else. Fear of missing out, greed and hype drive all markets on different scales and the effect is more pronounced for markets that are still developing and very immature.
What also started transpiring from mainstream media during 2017 though, was the tactic of looking at trading activity in bitcoin and ethereum (the cryptocurrencies that are most commonly traded by legacy folks as well) and take any bearish reversal signs there as a leading signal for development on more traditional technology markets. The idea is that because cryptocurrencies are such a high risk investment, when there is a change of sentiment and big traders start focusing on less risky strategies, they will first pull out of cryptocurrencies and then perhaps from riskier tech stocks, all the way down to the safest bets.
During bullish reversals, the risk seeking will go the other way round, which is why the legacy indicators available on TradingView are not completely useless even for traders who are solely trading crypto: even on the free plan you can have a legacy ADL under your favorite crypto chart to see the comparison. Alternatively, John Bollinger produces a weekly chart packed with much more than just the relevant information. You can find it here near the bottom - it is simply a PDF pack of charts without any comments or interpretations, but he recently made a quick guide available from here. You might still need to do a lot of research.
It is mostly the Advance-Decline idea that gets tested here, as the breadth thrust is calculated from it and anyone can load the IIIX indicator in the TradingView library.
To get a representative basket of cryptocurrencies I worked with the CCI30 index because the methodology there seemed sound to me. The individual weights of the assets change often, but for this calculation the weight does not matter.
The historical daily closing prices of the constituents for three months (February - April 2018) were taken from from Coinmarketcap, transformed into daily contributions (either +1 at a day’s advance or -1 at a day’s decline for each currency), grouped by day and summed up to get the total contribution for each day. The actual Advance-Decline Line is calculated by adding each day’s contribution to the sum of previous contributions.
Why working with crypto indexes is still tedious at the moment
The CCI30 composition changed three times in the first four months of 2018 and only the composition at the time of writing was used here. Technically the advance-decline line can be calculated from any basket but you should take this article only as a primer because the data is not completely faithful to the trusted CCI30 selection. Also in one case, February data was missing completely. This one coin was $ONT which is a completely new currency. The true ADL should have the February and March price data of ontology, vechain, steem and tether replaced with data for ardor, bytecoin, siacoin and stratis.
There are only 30 coins that are meant to represent the whole space which means there are also several small-cap coins that are volatile. For ADL that doesn’t matter since all daily changes get transformed into either +1 or -1, the size of the daily change does not show. So for instance, you cannot have a thin market pump drag the whole indicator up.
However, ADL on just thirty assets in a still very, very tiny and immature industry is not the same kind of information as ADL on the 500 stocks of S&P.
I thought perhaps calculating this kind of information is an overkill at this point. On top of that, it is also a major clusterfuck unless you really enjoy working with data. Because of that I was looking for some form of “lite” version of the timing approach as well. One thing that is fairly obvious is comparing the USD pairs of individual cryptocurrencies to the index charts.
Datasets and scripts are linked below.
The Advance-Decline Line for CCI30
Going back to the ADL topping signal (when the price of the assets is not declining yet but the ADL is), from the dataset of February to April 2018 it appears there was another such signal on the BTC/USD market: Compare the ADL on the break of February and March with what BTCUSD was doing. The data here is not fully faithful the CCI30 selection but in hindsight it may have been a correct signal that the bitcoin’s bounce to 12k USD was unsustainable.
In contrast to that, the situation during the rise that started at the end of April (with true CCI30 basket) looks far healthier as the ADL is rising as well. It might look confusing that the ADL values are negative but as explained earlier, this is not the indicator where it would make sense to look for absolute geometric divergences. The important information is that the line is rising which means that buying activity is picking up across the board.
The Market Timing Lite
Now for the similar kind of information that is less heavy on the data processing: CCI30 provides daily price data from their website and while it is not obvious what assets exactly are determining most of the price development of the index, clearly by the end of April 2018 the index rose relatively more steeply than many of the individual cryptocurrencies. While the information might seem trivial now, don’t underestimate its value: traders and investors do develop blind spots as a human can only monitor so many markets at the same time.
The key information here is that while a single asset’s pair might still seem very shaky, there is obviosuly a way to buy such a combination of crypto assets that the value of the basket will be close to approaching new highs. Arguably this information is enough to start looking for a setup.
With the point of market timing being only to establish a level where a good setup might come about, it seems that just watching a basket of cryptocurrencies is good enough. It removes the blind spots, it’s non time-consuming and it doesn’t need you to collect any data. There are a lot of questions open though - would the results be better if the number of constituents were higher? Would working with a basket of small cap altcoins give good information?
I am certainly going to work more on this topic. Let me know in the comments below or on Telegram if you are interested in more posts on market timing or some better gymnastics with the crypto indexes.
Posted in: Strategic Tools
Written by KarlVonBahnhof
KarlVonBahnhof also on Reddit, Chris belongs to the crypto trader class of 2013. Located in the Americas most of the time, you're most likely to meet at r/BitcoinMarkets though.