ETH/USD: Market Cycles and Investor Sentiment ExplainedIn this post, I’ll be shedding light on market cycles for cryptocurrencies, specifically Ethereum in this case, and how investors’ sentiments are reflected at certain phases of the cycle.
Market Cycle Explained
- We can refer to the graph in green, which demonstrates the overall market cycle
- Markets undergo phases of contractions and expansions, forming peaks during the expansionary phase, and troughs during the contractionary phase
- Overall, the market moves in an uptrend, forming higher lows and higher highs throughout
Market Sentiment Explained
- Along with fluctuations in price movement caused by volatility, traders’ and investors’ psychological responses are also reflected in the chart
- Prior to a bullrun, market participants are at a phase of disbelief. They think that prices will get rejected at resistance levels, and fail to break out
- After a breakout takes place, hope starts to settle in. People think that maybe a recovery to previous high levels are possible
- Then comes optimism. People start seeing the bullish trend that has been confirmed, and start thinking that this is the beginning of a real bullish rally.
- Afterwards, we have the belief phase, which is when people start to get fully invested in the asset or security. This is also where people start coming up with extremely bullish price targets for the long term.
- The thrill phase. People start getting extremely greedy at this point, and start buying more on margin, leveraging debt to increase their positions. At this point, prices are still going up on a daily basis, and people are still profiting from the immense buy volume, so they lead in their friends and family to invest as well.
- Then comes one of the most important phases, euphoria. At this point, people think they’re geniuses, and that they’ll be set for retirement next month. This is the phase were everyone is bullish, and the only thing leading price action is the momentum caused by new buyers
- The price of the asset tops out and corrects, reflecting a complacent sentiment. People just consider it as a healthy correction, and that the rally is deemed to continue upwards.
- Prices correct even further, stirring anxiety among investors. People start getting liquidated on their margin positions, and realize that the correction is extending further than they anticipated
- The denial phase then kicks in, as prices drop further. Investors refuse to accept that the trend has reversed.
- Prices drop even further, breaking all support zones, getting closer to new lows. Investors who have bought the top sell their positions here.
- Due to mass sell volume, capitulation takes place, and investors start thinking that the asset was never a solid investment decision.
- As prices consolidate around the bottom without any signs of a trend reversal, anger starts seeping in. People blame the market for being too manipulative, and the government for not regulating enough, and preventing such capitulation from happening in the first place
- As the phase of consolidation continues, investors experience depression. A sense of betrayal and self-pity, as they think of how they can retrieve their initial investment back.
- While they go through this negative phase of investor sentiment, prices break out once again, marking the beginning of the second disbelief phase.
Ethereum Analysis
- Ethereum is demonstrating this market cycle on the weekly chart
- It has currently broken out of major resistance levels, looking to continue its rally upwards
- Important resistance zones to keep an eye on are: $490, $620, and $800
- Important support zones to keep an eye on are: $470, $440, and $355
- Based on market cycles, as Bitcoin’s rally tops out and prices start consolidating, we should see capital flow into altcoins such as Ethereum
- Especially with Eth 2.0, an event in which the shift from proof of work to proof of state takes place, we could expect bullish news to drive prices upwards.
Conclusion
In summary, understanding general market cycles and investors’ sentiment is extremely important. Possessing the mental fortitude to buy when others are selling is also an important feat that an investor/trader should possess to succeed.
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