Sentiment Speaks: Are Cryptocurrencies A Pump Waiting For The Dump?

This article was written in collaboration with Avi Gilburt, founder of Elliott Wave Trader and was first published on Seeking Alpha, this morning, October 5th.

On Sept. 18, Ripple (XRP-USD), currently No. 3 in market cap amongst cryptocurrencies, broke out of the downtrend channel it had developed since its April top. This move was rather sudden but didn’t end for another four days, and until it had rallied 200% against the US dollar.

For crypto traders who have traded for more than a year, like Ryan, this rally harkens back to the move in December 2017, when Ripple launched from roughly 20 cents to over $3 in a little over four weeks. Is history set to repeat itself? Has a fresh rally of 2017 proportions started? Or is this just the latest "pump and dump" in the crypto space?

Since January of the current year we’ve seen multiple "fake rallies" in many currencies we follow, only to see new lows struck thereafter. Most of these rallies were accompanied by some news.

For example, Zclassic (ZCL-USD) saw a spike in April from the $2 region to over $40 in one month over excitement regarding its upcoming fork. Yet, now it rests near the prior lows in the $3 region. Ether Classic (ETC-USD) doubled from June to July after Coinbase announced they’d list the coin. Yet, today we are below the June lows.

Perhaps the most dramatic fall was seen in Verge (XVG-USD). The rumor and furor in April regarding a coming partnership with Pornhub was expected to make Verge - which was then just a bit more than 10 cents - a top-five cryptocurrency. However, Ryan held a special webinar that day and said it looked toppy, suggesting that one should ignore the news of the day. Verge is now nearly 80% lower than the announcement price. While the partner might be considered "tasteless," it is definitely a lucrative partnership. Yet, the fundamentals of this partnership weren't enough to keep Verge aloft.

We can go on and on. These price spikes since January wear down on the patience of crypto-traders as a growing throng begin to cry out phrases like "manipulation" and "pump and dump." From their perspective, adoption is growing and partnerships are being signed, so how else would prices be falling? These spikes to many suggest "fake" price movements girding the case that the spikes were large players making puppets of retail traders.

So, what should we think about the price spike in Ripple? Viewed through this lens, are we to believe Ripple will roll over on us? Could this be just another manipulation scheme in the crypto market?

Just as in the previous examples, there was also news associated with Ripple’s latest rise. The Ripple rally is reasoned to be due to the launch of the RapidX platform and the adoption by a few international payments companies. The Ripple developer conference has also been cited as a cause.

Crypto rallies, when in a bull market, are swift and provide multifold returns. They hold support when challenged, and move on until completion. The challenge is discerning the breakouts from the soon-to-be breakdowns.

Strong spikes that ultimately fail are a hallmark of a bear market. In Elliott Wave lexicon these rallies are called "B wave rallies," sandwiched between and a counter trend to the A and C waves that push price lower in a correction. Writing about B waves over 80 years ago, RN Elliott called them the waves of false hope. They are so difficult, Ryan has joked that B should stand for "Bastard."

B waves are to be fully expected in every correction, and they are not the result of manipulation. And, they are particularly volatile in cryptocurrencies, because that is the nature of this asset class.

So, is Ripple showing us one of these B waves? We don’t know yet. We bottomed well above long term support in Ripple. If we see a deep wave 2 on the weekly chart, we can see 4 cents. However, since we expect a bottom forthcoming in many cryptocurrencies we are giving this rally a chance.

B waves are different from impulses, in that they are 3, and not 5 waves. (For those who have been asking me about the remaining segments of my Elliott Wave articles, I will publish the final segments starting next week; I have been delayed due to the Jewish holiday season.)

So far, this rally in Ripple is best described as a 3-wave countertrend rally. However, we have marked the 44 cent region as support if this does morph into a 5-wave structure, thereby signaling the bottom has been struck. So, far we have 3 waves down into 43 cents, which is a bit deeper than preferred. If the market is going to prove a bottom has been struck, we’d like to see a rally to $1 or at least a rally over 78 cents, where the 3rd wave topped. If we see this, then we have a 5-wave rally off the recent lows, and most likely the end of the bear for Ripple.

These false rallies are part of the conditioning the market uses on market participants that prevents them from being on board the true rally when it begins. While we cannot yet promise that the bottom is in, we are coming to levels where a major rally is expected. And, as is the way of markets, rallies occur with as few passengers on the train as possible.

Ryan and I encourage you to not pass blame on markets when intense rallies fail. Rather, treat these events as the normal course of sentiment during a bear market. When we finally see the birth of a new bull market, these rallies will hold support and push on toward higher ground. If you are a skeptic when this occurs, you’ll miss the opportunity.