Bitcoin: Low Sentiment equals buying time
Trading is much more difficult than buy low, sell high. Social media provides some of the easiest and most robust form of market sentiment.
Buy Low, Sell High? Do it on sentiment, not price.
One of the maxims that new traders and investors first learn is to Buy Low and Sell High. It is horribly overly simplistic – but true – maxim. However, I think the truth of the statement is veiled between the actual message. I don’t believe buying low and selling high is meant only for what the present price is. To me, it makes more sense to view it from a measure of the mood or sentiment of the participants. In other words: buy when people are depressed, sell when they are ecstatic. Typically, you do see price matching sentiment, but not all the time. The problem is always in interpreting if market sentiment is at a low or high. So how do we measure sentiment?
There are few variables in financial markets that have such varied analysis methods as the variable of sentiment. One of the most interesting indicators for measuring sentiment (and, in my opinion, one of the most interesting indicators created) is the Coppock Curve. What makes this indicator so peculiar are the circumstances of its origins. It was created by an economist named E.S.C. Coppock. He was approached by some bishops of the Episcopal Church to help them understand when a good time to buy stocks would be. Coppock then had this revelation: the emotional responses that people experience during a massive down move is analogous to what happens when a loved one is lost. In other words, there is a period of mourning after such a shocking event. Coppock then inquired to other clergymen to estimate how long people typically mourn the loss of a loved one. He determined that the average amount of time was 11 to 14 months. The chart below shows this indicator.
The Coppock Curve is not a simple crossover measurement. The original use was for the stock market – but it seems to work just fine for Bitcoin (not very useful in Forex). The indicator is meant to identify buy signals – any cross above the zero line indicates the mourning phase is over and sentiment is improving. While crossovers of the zero line are bullish, a cross under does not mean it is bearish. In fact, most of the time the cross under is an opportunity to take profit or scale back a position and then re-enter later when another crossover even occurs. On the chart above, there have been only two instances where price has crossed above the zero line. The first began with the earliest data point on the chart back on August 24th, 2019 to the following cross under on September 2nd, 2014 – 1,111 days. The next crossover occurred on October 28th, 2015 to the next cross under on August 4th, 2018 – 1,011 days. We just experienced the third crossover on May 21st, 2019. You may also find it interesting that the major peak in the Coppock Curve on December 19th, 2017 was 50% of the all-time high peak on December 4th, 2013.
So, how does this help us with buying when sentiment is low? Since we know that a crossover of the zero line in the Coppock Curve generates a substantial uptrend that can last at least 1,000 days, then any major move lower that is accompanied by negative participant sentiment should be a buy signal. How do you identify the overall sentiment of the humans moving the markets? Easy: social media.
A great example of this is a Tweet by Fundstrat’s Thomas Lee where he responded to a user who Tweeted: ‘would hate to be an investor in ur fund rn, not sure what the misery index is today but gauging all the comments on CNBC and trading view Id say its -1000.’ Tom Lee responded, Tweeting back: ‘This is the best evidence that sentiment in Bitcoin is nearing a bottom. Angry HODLers… using the blame game. – a very good contratian signal. Thank you for playing the game and helping educate the market.’ When I see HODLers and traders of Bitcoin blaming others, or if I see/hear overwhelmingly negative news and sentiment, that is my signal to start buying.