How Will We Know When It’s a Bear Market?

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  • A cryptocurrency bear market is being discussed with as much vigour as it was back in May
  • The price action after Bitcoin hit $69,000 has not been particularly encouraging
  • How will we know when a bear market has actually hit?

The cryptocurrency markets are at a critical point, with the chances of a bullish continuation and a bearish u-turn seemingly equally possible. How will we know though when a bear market has hit? There are technical indicators that can help us see when the market has turned, with prior cycles also helping us make the call.

2017 Offers Great Illustration of Market Cycles

The unfortunate thing about a bear market is that you won’t know you’re in it ‘til you’re in it. By this point your portfolio could be some 50% down, but this is the drawback in waiting for absolute confirmation. On the other hand, selling too soon could leave you with huge regrets.

A bull market is typified by the asset in question putting in continual higher highs and higher lows over a high timeframe – in the case of cryptocurrency, months into years. This shows that every dip is being bought up by those who expect prices to rise higher. In a bear market, every upward burst is rejected at points of resistance before falling lower, illustrating that traders are selling on every bounce because they expect prices to fall lower.

Let’s look at this in practice. Here’s the cryptocurrency market cap chart from January 2015 to December 2017:

cryptocurrency market cap 1

We can clearly see a continual uptrend where every dip was bought up as the valuations accelerated higher. Resistances set by temporary tops were quickly broken and replaced with new highs.

Now let’s compare with the chart from January 2018 to December 2019:

cryptocurrency market cap 2

The contrast couldn’t be more stark – a series of lower highs and lower lows, indicating that traders are selling at every bounce. Even the bounce from December 2018 to June 2019 ended when it hit a prior resistance level. This was a sign that the market was still bearish.

Today’s Picture is Unclear

How does this compare with the current market? Here’s the total cryptocurrency market cap between March 2020 to today:

cryptocurrency market cap 3

Once again we can see the familiar bull run pattern of every dip getting bought up along the way up to May 2021. The May 2021 crash is different in shape to the January 2018 crash in that the correction wasn’t as violent, and the bounce that would in a bear market indicate a lower high and spell trouble, instead took it right back to all time highs, something that indicates strength in the market still remains.

If the May 2021 crash had signalled the start of the bear market we would have expected $1.65 trillion to have been rejected and for the valuation of the crypto market to fall to the next support at around $1 trillion.

Right now we are in no-mans land when it comes to the situation in the crypto markets. The $3 trillion market valuation that came in November has acted as a second local top in 2021, but the fact that this has acted as a higher high from May is suggestive that the bull market isn’t over yet.

Key Support/Resistance Areas will Indicate Bear Market

In an ideal world, $1.85 trillion will act as support which would set in a higher high and a higher low on a higher time frame and would suggest that another leg is incoming:

cryptocurrency market cap 4

If the valuation drops below $1.85 trillion and cannot get above it then we are faced with two scenarios – further accumulation or a bear market. Accumulation would see the critical level of $1.2 trillion holding while the market consolidates before a further move up in early-mid 2022:

cryptocurrency market cap 5

The worst case scenario is that prior supports become resistances as downward momentum increases, which would bring a bear market with it:

cryptocurrency market cap 6

What are the chances of a bear market hitting now? With the Federal Reserve possibly about to make the dollar a more attractive investment entity over the next few years, plus the fact that the entire cryptocurrency market has been in a bull run for getting on for two years now, it could be argued that all the ingredients are there for the party to come to an end.

However, until the charts conclusively state that we can hope that this is just another pullback in a longer cycle.