The cryptocurrency world has been all over the place lately. It looked like it was going to roll over in late July, but Bitcoin (CCC:BTC-USD), Ethereum (CCC:ETH-USD) and others found some momentum and ran with it.
For Ethereum, that meant a 130% rally from the lows, as the cryptocurrency crossed the $4,000 barrier earlier this month. An abrupt pullback was met by buyers, but then the Evergrande (OTCMKTS:EGRNF) news out of China sank cryptocurrencies.
Is the group really that exposed to Evergrande?
Evergrande and Cryptos
The stock market had been struggling through a tough couple of weeks coming into Sept. 20. After several low-volume trading weeks where the markets ground along (spending too much time going absolutely nowhere), stocks began to sputter. But they were only down slightly coming into the 20th. Then worries over the Evergrande Group sprang up, sending index futures lower on Sunday night and then plummeting on Monday the 20th.
Why does this matter? Because cryptocurrencies took the same path, Ethereum included. Although like usual, the group did so with far more volatility. From its high on Sunday to its low on Monday, Ethereum fell 20%. It has since recovered somewhat but remains below the $3,000 threshold.
While Evergrande Group does not actually have a direct impact on cryptocurrencies (or U.S. stocks for that matter), there are concerns about broader implications. Specifically, it creates concerns over the Chinese economy and China’s real estate market.
Although some are calling this China’s “Lehman moment,” my hope is that it’s far more isolated than that. By making it into a Lehman moment, that creates systemic risk. When we’re dealing with that, it doesn’t matter that Microsoft (NASDAQ:MSFT) or the S&P 500 aren’t directly affected — or in this case, Ethereum.
What it creates is panic and “risk-off” trades, and that does affect these assets.
I think the Evergrande Group news was more of an excuse for the market to do what it wanted all along, which was to go through a mild selloff. Unless this creates a compounded systemic issue in China, U.S. equities and cryptocurrencies shouldn’t face too large of an effect from this situation.
The situation with Ethereum is a bit trickier. While the S&P 500 fell a couple of percent, Ethereum tumbled into a technical bear market.
On Monday’s dip, Ethereum tested into and held the $2,900 to $3,000 area. It also held the daily volume-weighted average price (VWAP) measure. A day later and it closed below all of these levels — plus the 21-week moving average.
Ethereum is trying to reclaim this area now, but it’s sitting below the VWAP measure and hanging around $2,950. Back above $3,000 and this one will look better. Still though, concerns linger.
So far we’ve got an “ABC” correction down toward (but not to) the 200-day moving average. At this week’s low, Ethereum was down well over 30% from the highs.
From here, see how it handles the VWAP measure on the upside and the 21-week moving average on the downside. A move above the VWAP and $3,000 level opens the door to the 50-day moving average and $3,350 area. Above that and the Sept. 16 high near $3,665 is in play.
The risk with a rally is that Ethereum sets up for an “ABCDE” correction, which could land the cryptocurrency below $2,500. I know investors don’t like this type of arbitrary view, essentially saying Ethereum could do “this or that.” I’m sorry, but that’s how asset prices work. All we can do is follow along as best as we can.
On the flip side, a move below the 21-week moving average puts this week’s low and the 200-day moving average in play. Below that and $2,500 or lower could be on deck.
The Bottom Line
I realize I’m not talking about Ethereum as a raging bull in this article. But that’s because short-term price gyrations can occur regardless of the fundamentals or long-term bullish thesis.
Did the selloff in many stocks make sense in March 2020? Clearly not, and the same could be said for Ethereum now. Even if we see $1,750 to $2,000 again, that doesn’t change any of Ethereum’s long-term potential.
For now I will remain a long-term bull, but in the short term, Ethereum remains a “prove-it” asset. Back above $3,000 and this one can rally. Below the 21-week moving average and I’ll be watching for a deeper dip.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.