Monero's Trend Is Neutral Amid Bitcoin's Volatility, But Highly Correlated
Since my previous article on Monero (XMR), price has risen from $50.70 to $68.74, a 35.58% increase. In that time, Monero has made more recovery from the yearly low and has positioned itself in a good spot, however the trend remains neutral. In this article, I compare the price action of Monero to Bitcoin's and run a correlation, I also look at the heikin-ashi chart, and a few other indicators.
Upon looking closer at the Monero chart, it reminded me of the Bitcoin chart. To properly compare them I used the price in z-scores and plotted it below. While Bitcoin shows more volatility, Monero generally follows the same trend as Bitcoin. It makes sense that as Bitcoin was rising up towards the $10,000 area, Monero would rise too, however the line (red) is much smoother compared to the Bitcoin line (orange). To confirm this observation, I ran the correlation, r(2205) = .90, p < .01. The sample for the correlation only included year-to-date data. I found that about 81% of Monero's price action can be explained by its relationship to Bitcoin. I have graphed the price of Monero and Bitcoin for comparison below. This suggests that YTD, Monero's price action has a strong and significant relationship to Bitcoin's.
Monero and Bitcoin z-score price comparison.
As can be seen in the comparison above, Monero's price follows Bitcoin's most of the time. This is even true for the moving averages below. The MA's are following a similar trend as the moving averages in the Bitcoin chart. For example, it even made the same golden cross as Bitcoin did. Look at how the 50-day moving average (orange) crosses over the 100-day MA (yellow), forming a golden cross. Price is currently sitting right above the 20-MA (red). This is exactly how Bitcoin has been positioned in the last few weeks. However, unlike Bitcoin, Monero appears to have remained more stable. There were no large movements with Monero like there was in Bitcoin. This can be seen in both the candle chart below and the comparison chart above (smoother line). Lastly, I want to mention an odd observation I made. There are those five weird candles between May 10th and 17th. I zoom in on them in the following image. I do not know what happened here. I messaged support and I am (as of writing) still waiting on a reply. I checked the BTSE Twitter and did not see anything suggesting an interruption or anything like that that would explain what happened. I guess I will have to wait to find out. I'll get back to you all on this later. Let us move on to the Fibonacci retracements.
I tried something different with Monero's Fibonacci retracements this time. Typically, I would Identify some sort of low or bottom and configure the Fibonacci retracements from there. This time I set it to zero. The thought is that in a worst case scenario, it will go back to being worth zero. I have been adopting this method in other analysis as well. Anyway, the BTSE chart lacks the history to show the entire history but data taken from coinmetrics.io suggests that Monero hit an all-time-high of $477.12. Using this as the high for the Fibonacci retracement places Monero in the lower part of the 78.6%. In traditional markets, when a stock reaches this level on a Fibonacci retracement, it is considered done for. However, these are no traditional markets. Monero is only $33.92 away from even reaching the 78.6% Fibonacci level. Even when/if it reaches it, Monero will have to establish support in this area and will likely face resistance while at it too. Nevertheless, we continue. To get a better idea of the trend, I will look at the chart using the heikin-ashi technique.
Here I zoom into the five weird candles.
The five weird candles.
The heikin-ashi technique suggests the current trend is neutral. The current candle is green but has a small body with wicks on both ends. A series of candles have followed a similar trend. There is no definite trend at the moment but the bias lies on an uptrend judging by the green candle alone. Next I will look at the MACD.
The MACD line (blue) and the signal line (red) are moving horizontally above the zero line. The trend here is also neutral. Nothing much going on here. The Chaikin Money Flow (CMF) is looking good though.
Chaikin Money Flow
This is interesting. The CMF shows a large drop off the days following those weird looking candles I mentioned before. The drop bottomed out at the end of week three in May and made a new yearly low. I do not know what happened in that period of time but the CMF recovered and is not positioned right above the zero line, indicating increasing buying momentum. Despite the anomaly, this is a decent place to be. Next I look at the On Balance Volume (OBV).
Chaikin Money Flow.
On Balance Volume
The OBV is showing a pattern of higher lows and higher highs. To be established, the OBV would need to make its next higher high in the coming month. However, in its current position it can go either way, especially when taking into account how most of the indicators I looked at were neutral.
On Balance Volume.
Overall, Monero has remained neutral during all of Bitcoin's volatility. This makes sense when looking at the strong correlation the two have YTD. Also, assets in traditional markets tend to become more closely correlated during times of heightened volatility, for example with events such as the 2008 recession. The current market has definitely experienced heightened volatility given all the significant world events that have occurred in 2020 so far. Therefore, it is not surprising that Monero's price action shares such a high correlation with Bitcoin's. Given the current times, I expect continued volatility in the near future and therefore expect for Monero to continue to correlate with Bitcoin. If Bitcoin goes up, so will Monero, and vice versa. According to John Edwards, contributing author to Investopedia.com, I would take this correlation into consideration when building out my portfolio because choosing assets with little-to-no correlation to each can help reduce risk and increase diversification. A portfolio with too many correlated assets can bring on unnecessary risk because if one goes down, the other is likely to go with it. Therefore, adding assets that have little-to-no correlation can help increase the diversification of a portfolio and reduce overall risk.
Edwards, J. (2020). Why market correlation matters. Investopedia, May 25th, 2020, https://www.investopedia.com/articles/financial-advisors/022516/4-reasons-why-market-correlation-matters.asp
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