What is behind the recent rally?
We witnessed in the past two days a surge in crypto, stocks, and other asset prices.
BTC/USD: +6%
ETH/USD: +12%
SPY/USD: +4%
EUR/USD:+1.8
Is it the end of the bear market? Is it a bull trap? or is it just some market volatility?
We can say with confidence that this massive and sudden price action move to the upside comes after three main reasons.
1. DXY stopped its rally
The dollar currency index known as DXY was witnessing an uptrend since the start of the bear market last year and we already mentioned in past articles how the start of the DXY rally in late 2021 is the main catalyst of the bear market. To understand how this impacts asset prices I will explain it in simpler terms, DXY measures the strength of the U.S Dollar and most investors and traders measure the value of their assets in U.S Dollar. This means a stronger Dollar will result in lower asset prices compared to it. When the Dollar value decreases like what we have been witnessing on the DXY chart the relative value of other assets in Dollars increases.
Technical Analysis: Currently, DXY is at a support level just below the 50EMA if we break below this support we can be witnessing the spark of a fresh new Bull market or at least a decent uptrend, but in case the support holds we can expect the bear market to continue.
2. Short squeeze
We have just witnessed one of if not the biggest short liquidation events this year. More than 320 million Dollar worth of shorts got wiped out in addition to those known numbers we have obviously liquidations that happened on Binance and a lot of them since Binance is the biggest crypto exchange in the world with the most users but unfortunately at the beginning of the year, Binance stopped sharing its liquidations data. So we can't tell with exactitude how much was liquidated but we know for sure that it is a huge number.
The technicality of this event:Those shorts being liquidated fueled a buying pressure, that resulted in the price going up which resulted in more shorts getting liquidated and this domino effect continued till it reached a strong resistance.
Ethereum especially witnessed a violent short squeeze going up more than $95 (+6.5%) in 4 min.
3. Speculation about Central Banks pivot
A lot of investors are speculating on the possibility that the FED and other Central Banks start easing interest rates hick to escape the looming recession.
If you want to know how the FED and central banks impact markets I made a whole video on youtube explaining the process https://youtu.be/KZLXKO965Bw.
If central banks start lowering interest rates or even continue raising rates at slower rates this usually is a great buy signal for traders. As of today 26 Oct, the Central Bank of Canada raised rates by 0.5% even though the expected raise was 0.75%, the Bank of Japan is making direct market intervention to support the Yen parity against the U.S Dollar the Bank of England may have to extend it's bonds purchase to help retirement fund escape a liquidity squeeze. Many other global events might pressure the FED to pivot or at least slow down on rate hikes and this is what is pushing assets prices up and DXY down.
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