Market capitalization becomes a lot Flack to be a poor metric to measure the value of a cryptocurrency – and perhaps rightly so – but this should not prevent traders from using it as a tool to generate market bias.
Summing up: the market capitalization of a cryptocurrency is a function of the market price multiplied by the circulating offer, so its fluctuating value ends up visually mimicking that of price action when it is plotted on a price chart . And if it imitates price action, then technical analysis – the study of market behavior through price movements – can be applied to it as if the bitcoin price chart (BTC) was analyzed.
It is no secret that cryptocurrencies are highly speculative assets that all rely on the widespread adoption of blockchain and DLP (distributed ledger technology). Since the whole market is so dependent on the success of this factor, it is rare for individual cryptocurrency trends to deviate too much from one to another for too long.
In other words, they are highly correlated, so if a cryptocurrency rises or falls in price, it is likely that others will follow soon.
For the swing trader or long-term investor who does not care about the intraday price fluctuations, tracing the total market capitalization of all cryptocurrencies or only alternative cryptocurrencies (altcoin) can be a penetrating way to analyze the tendency to long-term or the prejudice of the wider market.
Apparently, the total capitalization of the altcoin market is in an interesting technical conjuncture that could soon lead to another boom or failure for the market, which is further analyzed below through the use of technical analysis.
If we perform a simple technical analysis of the total capitalization of the altcoin market and link the two main peaks in 2018, a long-term diagonal downtrend line is created.
In technical analysis, the rupture of a trend line towards the top is a bullish indication and suggests that the general trend is starting to change. In the long run, however, the trend line is harder to break.
As can be seen in the weekly chart above, the capitalization has come very close to touching the trend line but has since retreated, as indicated by the visible upper wick.
Looking at the weekly candelabra from January and May, another rejection from the trend line could lead to a significant sell-off, while a weekly closing above the trend line would suggest that the long-term trend of the altcoin market is starting to shift from bearish to bullish.
While the weekly chart shows an important resistance obstacle that must be interrupted for a long-term market trend reversal, the daily chart reveals a short-term outlook on the market outlook, which has its hurdles.
The model highlighted in the table above is known as a reverse head and shoulders model that is a common "bottom" or inversion model.
The model consists of three successive vessels, with the first and third similar in width and depth, but more superficial than the central trough, known as the head.
In order for the inversion to take effect, the market capitalization should find acceptance over the neckline that was created by connecting the tops on both sides of the head with a trend line.
If successful, the head depth can be added to the breaking point to set a potential target. The head depth here is $ 34 billion, so if we add this to an early break-up point, the market could have a potential increase of 31% to $ 141 billion in the not-too-distant future.
Fibonacci retracement levels could be used as intermediate resistance levels, the closest of which is the retracement of 0.382 close to $ 114 billion.
- The market capitalization chart mimics that of price action and can be used to provide a broad perspective on the entire market.
- Finding acceptance above the reverse head and the neckline on the shoulder would create a medium-term target for $ 141 billion, while breaking the weekly downtrend would suggest a longer-term decline to a change in uptrend.
- Another rejection from the weekly downtrend would increase the possibility of a wider market sell-off.
Revelation: The author retains BTC, AST, REQ, OMG, FUEL, 1st and AMP at the time of writing.
Image of the chart via Shutterstock