While most crypto market watchers remain focused on Bitcoin’s continued struggle with $31,000, Ethereum recently closed above the psychologically important $2,000 level for the first time in weeks. Now about to close lower for four consecutive days, let’s take an evidence-based approach and determine if four consecutive days of decline for Ether is historically bullish or bearish going forward. Let’s dive!
Ethereum’s close above $2000 followed by a pullback
After closing at an impressive multi-week high and breaking back above the $2,000 level on July 13, Ether has been declining for four consecutive sessions, one of the conditions we will momentarily test. To further add context to the test, we will also add two more conditions requiring that [1] Ether is above its 200ma and that [2] its 200ma is up. For what? The 200ma and its slope both act as simple filters to help determine the market regime. For example, this latest four-day Ether pullback occurs in an improving market in which ETH is above the 200ma high. If the current four-day pullback occurs in a downtrend market regime, we would demand ETH to be below its 200 million decline.
Ethereum Daily Chart | ETHUSD on TradingView.com
What does this Ethereum pullback suggest for its price? To find out, we will look at all the signals from the beginning and also compare these signals to a simple buy and hold approach. This will provide us with a baseline to better understand today’s test results.
Four days down from buy and hold
The holding time chart below shows the historical results of Ether’s current technical setup at the top with a simple “buy and hold” approach at the bottom. In other words, we will show hypothetical results using different hold times only for when Ethereum closed lower for four consecutive days while above its 200mA high. The lower results will serve as a benchmark, assuming a hypothetical purchase of ETHUSD with no strings attached and an exit n days later.
Average Trade Comparison | SOURCE: REK Telligence, Table
Although both approaches show positive average trade results on every exit we tested from 7 to 90 days, our buy and hold baseline actually outperforms the current four-day technical setup. The only exception is the “90-day exit” in which the current setup slightly exceeds the historical average of the “buy and hold” trade, beating it from 62.1% to 59.4%.
But while the average trade stat remains important, it doesn’t always tell the whole story. When looking at a comparison of the largest hypothetical losses for the two approaches using the same conditions described earlier, note that the largest losses (i.e., worst trades) for the current four-day setup are much lower than those of a simple “buy and hold”. approach. This larger loss comparison indicates that while the current setup may not beat “buy and hold” in terms of average trade, Ethereum may currently have lower than normal risk exposure – which most experienced traders will appreciate.
Comparison of the biggest losses | SOURCE: REK Telligence, Table
While the past does not predict the future, based on our analysis, Ethereum appears poised for upside potential mostly in line with typical “buy and hold” expectations. In other words, not too exciting and seemingly devoid of any significant benefit at the moment. That said, the risk also appears to be lower than usual compared to the larger buy-and-hold loss stats. Traders take note. Ethereum can now offer its typical return profile based on its current technical setup, but with lower overall risk exposure.
DB the Quant is the author of the REKTelligence Report newsletter on Substack. Follow @REKTelligence on Twitter for evidence-based market research and analysis. Important Note: This content is strictly educational in nature and should not be considered investment advice. Featured images created with Tableau. Charts from TradingView.com.