At the start of the week, ETH/USD opened with a gap to the upside which took price action above its 61.8 Fibonacci Retracement Fan Resistance Level. Ethereum is the second largest cryptocurrency behind Bitcoin, but it deploys an entirely different architecture which is why many alternative coins are created on the Ethereum blockchain. While Bitcoin has led the push in cryptocurrencies on a global level, Ethereum has carved out a spot of its own and also supports smart contracts which are essential for the development of decentralized applications or dApps. Preceding the gap at the start of this week above its 61.8 Fibonacci Retracement Fan Resistance Level was a shallow uptrend.
What is the Fibonacci Retracement Fan?
The Fibonacci Retracement Fan is a different visualization of the Fibonacci retracement sequence which outlines important support and resistance levels in technical analysis. Those levels warrant a closer look and offer entry and exit levels for trades together with other aspects of the analysis.
The Force Index, a next generation technical indicator, didn’t confirm the gap and a negative divergence formed. This represents a strong bearish trading signal and is marked by the green rectangle. A negative divergence forms when price action moves to the upside while the underlying indicator records a lower high. The Force Index did move into positive territory which suggests that bulls are in control, but the loss in momentum highlights the risk of a reversal below the 0 center line which would give control back to bears.
What is the Force Index?
The force index is considered a next generation technical indicator. As the name suggests, it measures the force behind a move. In other words, forex traders will get a better idea behind the strength of bullish or bearish pressures which are driving price action. The indicator consist of three components (directional change of the price, the degree of the change and the trading volume). This creates an oscillator which in conjunction with other aspects of technical analysis provides a good indicator for potential changes in the direction of price action. It subtracts the previous day closing price from today’s closing price and multiplies it by the volume. Strong moves are supported by volume and create the most accurate trading signals.
The opening gap in ETH/USD represents the second price gap since August, both are marked by the red circles in the chart. The previous gap was quickly closed and price action followed by recording a lower low. The current technical picture suggests that this week’s gap will be closed as well and given the strength in the Force Index during the closure, a new low below its intra-day low of 158.80 cannot be ruled out. The current intra-day low represents the bottom range of its support zone as well as the origin of the drift higher which preceded that price gap.
What is a Price Gap?
A price gap occurs when the opening price of an asset at the start of a new trading session is well above or below the previous day’s close with no trading in between. This results in a blank space in the chart. A price gap usually occurs when a fundamental event causes buyers or sellers to crowd an assets. This can mark the start of a new trend, but over time gaps may be closed. The closing of a price gap can also happen shortly after its creation. It depends on the type of gap, the reason behind it and if volume has supported the direction of the move.
Following the price gap, ETH/USD extended its advance into its resistance zone which is located between 192.28 and 199.06, marked by the red rectangle. The bottom of this range also marks the intra-day high recorded on the day of the previous price gap. After this cryptocurrency pair reached its resistance zone, bullish momentum faded quickly as evident by the Force Index. A breakdown is expected to follow, confirmed by a move in the Force Index below 0, which will close the price gap and take price action down into its descending 61.8 Fibonacci Retracement Fan Support Level; it turned from resistance to support following the gap.
What is a Breakdown?
A breakdown is the opposite of a breakout and occurs when price action moves below a support or resistance zone. A breakdown below a resistance zone could suggest a short-term move such as profit taking by forex traders or a long-term move such as a trend reversal from bullish to bearish. A breakdown below a support zone indicates a strong bearish trend and the extension of the downtrend.
ETH/USD Technical Trading Set-Up - Breakdown Scenario
Short Entry @ 192.25
Take Profit @ 160.00
Stop Loss @ 202.00
Downside Potential: 3,225 pips
Upside Risk: 975 pips
Risk/Reward Ratio: 3.31
The breakdown in the ETH/USD is expected to take price action back into its support zone,located between 158.80 and 169.22 and marked by the grey rectangle. The 50.0 Fibonacci Retracement Fan Support Level is currently located inside of this zone. A breakout above its resistance zone, given the current technical composition, is highly unlikely. The Force Index is gathering downside momentum which may result in a lower low. The upside potential is also limited to the top range of its next long-term resistance zone at 217.13 and a positive fundamental development in Ethereum would be required for a breakout.
What is a Breakout?
A breakout occurs if price action moves above a support or resistance zone. A breakout above a support zone could signal a short-term move, such as a short-covering rally which occurs when forex traders exit short positions and realize trading profits, or a long-term move such as the start of a trend reversal from bearish to bullish. A breakout above a resistance zone signals strong bullish momentum and an extension of the existing uptrend.
ETH/USD Technical Trading Set-Up - Limited Breakout Scenario
Long Entry @ 204.75
Take Profit @ 217.00
Stop Loss @ 199.00
Upside Potential: 1,225 pips
Downside Risk: 575 pips
Risk/Reward Ratio: 2.13
