Ethereum’s four-day decline: bullish or bearish?

Ethereum's four-day decline: bullish or bearish?

The Historical Significance of Ethereum’s Close Above $2000

Recently, Ethereum (ETH) made headlines by closing above the psychologically important level of $2000 for the first time in weeks. However, it has since experienced a pullback for four consecutive days, leading to questions about whether this is a bullish or bearish signal for the future. To answer this, we need to take an evidence-based approach and examine historical data.

To provide context for our analysis, we’ll consider two additional conditions. Firstly, we’ll require that Ether is above its 200-day moving average (200ma). The 200ma is a commonly used technical indicator that helps determine the market regime. In this case, it acts as a filter to ensure that the current pullback is occurring in an improving market. Secondly, we’ll also consider the slope of the 200ma, requiring that it is rising. This condition further confirms the positive market trajectory.

Ethereum Daily Chart

Examining the Pullback in Ethereum

Now, let’s delve into what this pullback in Ethereum suggests for its price. To do so, we’ll compare the current technical setup to a simple “buy and hold” approach. By analyzing all signals since Ethereum’s inception, we can establish a baseline for understanding the results of our test.

Average Trade Comparison

As shown in the graphic above, both the current technical setup and the “buy and hold” approach yield positive average trade results over various holding times ranging from 7 to 90 days. However, the “buy and hold” approach outperforms the four-day pullback setup in most cases. The only exception is the 90-day holding period, where the current setup slightly outpaces the historical average “buy and hold” trade.

While average trade statistics are important, they don’t tell the whole story. Examining the largest hypothetical losses for both approaches reveals an interesting insight. Despite the current setup’s lower average trade performance, it actually presents a lower risk exposure compared to the “buy and hold” approach. This is evident from the fact that the largest losses for the four-day pullback setup are significantly lower than those for the simple “buy and hold” strategy. Experienced traders would appreciate this lower risk exposure, even if the average trade performance is slightly lower.

Largest Loss Comparison

In conclusion, while Ethereum’s four-day pullback after closing above $2000 may not be historically bullish in terms of average trade performance, it does showcase a lower risk exposure compared to a simple “buy and hold” approach. This indicates a potentially favorable risk-reward ratio for traders. However, it’s important to note that this analysis is based on historical data and should not be considered investment advice.

DB the Quant is the author of the REKTelligence Report newsletter on Substack. For evidence-based crypto market research and analysis, follow @REKTelligence on Twitter.