The selloff the past week or so, is not what this market should have been doing. For months we have been mentioning large institutions were likely accumulating and there were many signs of evidence. Last month we learned several endowment funds invested in the previous quarter. However clearly the market was not acting right and the prolong consolidation since September seemed somewhat suspicious. Fortunately, one of the trading legends provided some insight in a book written over 80 years ago.
Richard Wyckoff, wrote a manifesto on how large operators engineer trades, and force weak hands out of the market. In his book The Richard D. Wyckoff Method of Trading and Investing in Stocks – A Course of instruction in Stock Market Science and Technique he laid out exactly how large operators do this.
Source Wyckoff (1937):
“Those who understand it buy only when prices are low with the idea of selling when they are high; and they operate only in the stocks or commodities which they can move best so they may secure the highest possible rate of turnover of inventories.
The preparation of an important move in the market takes a considerable time. A large operator or investor acting singly cannot often, in a single day’s session, buy 25,000 to 100,000 shares of stock without putting the price up too much. Instead, he takes days, weeks or months in which to accumulate his line in one or many stocks.
He prefers to do this while the market is weak, dull, inactive and depressed. To the extent that they are able, he, and the other interests with whom he works, bring about the very conditions which are most favorable for accumulation of stocks at low prices.
When he wishes to accumulate a line, he raids the market for that stock, makes it look very weak, and gives it the appearance of heavy liquidation by sending in selling orders through a great number of brokers.”
“They operate in stocks or commodities which they can move best”. What easier market is there to manipulate or engineer trades than the crypto space? It is unregulated; there are no rules or oversight governing bodies. This is the perfect market for engineering trades.
“He prefers to do this when the market is weak, dull, inactive and depressed.” After months of watching paint dry, in a boring market Bitcoin surely meets the requirement of weak, dull, inactive and depressed. Note how many analysts were becoming undecided in direction? Were getting ready or already threw in the towel?
“When he wishes to accumulate a line, he raids the market for that stock”. Is this what is happening, and are they any clues?
This is the perfect example of what Wycoff described in his book. Two long months of a range bound market, which was dull, inactive and depressed. High volume spikes could be indicative of a raid or dump, as well as a sign of a top or bottom. Now I want to be painfully clear, this is just one of many signs of what we look for. We consider this additional evidence, not a smoking gun.
Often volume spikes are a sign of a final flush out, or market top. The reason is, many finally throw in the towel, or buy into the FOMO. Now this is not always true, and trying to buy the volume spike, has had us buying early, getting stopped out, then the market rallies. So let’s not put too much weight into it, but final flushes are generally accompanied by a volume spike.
Is there any more evidence?
During the selloff normally leveraged longs would either go down (from being liquidated) or remain stagnant. This is not the case here. Longs interest has increased into the selloff. This is very odd as it is likely many leveraged longs were stopped out of positions, especially those over leveraged.
Again this is not a smoking gun but provides additional evidence someone or a group of traders is accumulating into the selloff.
Many of you may feel discouraged, beaten up, and even hopeless. This is completely understandable and not out of the ordinary. As you gain more experience, and go through more market downturns, these emotions will be more controlled.
We actually joke about these events daily eating breakfast with my buddy Wild Bill. We joke, tease each other, and compare portfolios. Neither of us or Marc are phased by these moves. This is just normal market reaction. We do not get discouraged, or upset about a stock, crypto, or commodity going down after its bought.
I know I mention this all the time, but long term is long term.
The losing mentality is easy to have during these periods of time. The feeling of hopelessness, depressed, why did I buy, this is never going to end, getting discouraged and throwing I’m ready to throw in the towel. This is not how big players think. This is exactly how they want you to think.
As Richard Wyckoff said, money flows from the weak to the strong, and you have to determine whether you are strong enough to stomach market selloffs. Not just in the market, but in life as well. Markets are nothing more than an extension of life. We all go through hard times in life, where we think, how am I ever going to get out of this, this is never going to end, I just want it to be over. How you handle these times is indicative of your character.
You want to be successful in trading or in life, you must learn to handle your emotions during adverse times. It’s easy to be positive when your winning and things are going your way, but that does not provide insight to your character. What does is how you think and act when your not winning and things are not going your way.
So what do we do from here? We simply adjust, analyze and evaluate. We also put the market on hold and stopped buying until we see some stabilization. In simple words the entire crypto market is in the penalty box.
One reason I do not sell my long term holdings during corrections, is because they are long term. I still remember the 1987 market crash, the 2001 dotcom bubble, the 2008 financial crisis and even the 2015 Brexit crash. We are higher than any of those times today. If you believe that Bitcoin is going higher in the long term, this is simply just noise.
If you are unsure about the future of Bitcoin and the space as a whole, than maybe this is not the market for you. Again wealth is not built over night, it is built over decades. To think you are going to be a Bitcoin Millionaire next year is naïve to say the least. Just like gold and silver, you simply accumulate over time.
We do not know whether the current price action is due to market engineering. However the evidence is there that supports this theory. It is almost a play by play out of Wycoff’s book. However we do know that larger endowment funds, like Harvard, Yale, Princeton, MIT and Dartmouth have invested in the space. In addition we know that Goldman Sach’s, Fidelity and VanEck are all creating instruments for cryptos.
So is this the time you throw in the towel? I’m not, but this is a decision you have to make as an investor. Some can simply not take the pain or emotional strain of the markets. If you want to learn to be a trader and investor, it starts with emotional control and understanding nothing goes straight up.
Regardless of those that claim to be fortune tellers trading and investing is not an easy discipline to master. It takes time, patience, the ability to learn, and most of all True Grit!