DXY bounces off major support, reducing Bitcoin’s chances of breaking the $17,200 resistance

The US dollar index (DXY), an index that measures the dollar’s strength against a basket of major foreign currencies, hit 104.40 on December 2, the lowest level in five months.

Note that the US dollar’s weight against a basket of major foreign currencies rose 19.6% in 2022 through the end of September, as investors sought protection from the impact of a hawkish Federal Reserve and the recent impact of rising energy costs and high inflation. .

As the 114.60 peak is a 20-year high, the USD pullback could be a temporary correction to neutralize its “overbought” situation. Still, its inverse correlation with Bitcoin (BTC) remains strong, as analyst Thecryer noted on Twitter:

Watch for intraday DXY’s pullback from 104.40 to 105.50 as Bitcoin faces a flash crash of $230 to $16,790. Such moves reinforce how the performance of cryptocurrencies remains dependent on traditional markets.

Bitcoin enthusiast Aldo the Apache noted that the DXY had a “bullish divergence in support” as the S&P 500 stock market index struggled with a vital resistance level.

According to the analyst, if the expected trajectory is confirmed with the US dollar strengthening against major fiat currencies and the stock market faces another pullback, the net effect for Bitcoin will be negative.

On-chain metrics also present a potentially bearish picture as Bitcoin miners fear entering the exchange. a new wave of capitulation, increased the selling of BTC reserves. For example, the record hash rate and rising energy costs have drastically cut into miners’ profitability.

Measuring BTC output from Glassnode’s miner wallets relative to a one-year moving average, the large number of miner flows is now at a six-month high.

Let’s look at the dimensions of derivatives to better understand how professional traders position themselves in current market conditions.

Bitcoin margin is seeing a long-term sharp decline

Margin markets provide information on how professional traders position themselves, as it allows investors to borrow cryptocurrency to leverage their positions.

For example, one can increase the risk by taking stablecoins to buy Bitcoin. On the other hand, Bitcoin borrowers can only use the cryptocurrency for a short period of time because they are betting that the price of the cryptocurrency will fall. Unlike futures contracts, the balance between margin longs and shorts does not always match.

OKX stablecoin/BTC margin loan ratio. Source: OKX

The chart above shows that the margin lending ratio of OKX traders declined strongly from November 27th to 30th, indicating that professional traders are reducing their leverage lengths during the dip towards $16,000.

More importantly, the subsequent $1,250 gain that took Bitcoin to $17,250 on November 30 was not enough to instill confidence among Bitcoin buyers using stablecoin debt. Still, currently at 23, the metric favors stablecoin borrowing by a wide margin – indicating that shorts are unsure about building low-leveraged positions.

Related: Crypto miners in Russia are taking advantage of the bear market by stocking up on ASIC devices

Option traders are risk averse

Traders should analyze the options markets to understand whether Bitcoin will successfully break the $17,250 resistance. A 25% delta skew is a telltale sign when arbitrage tables and market makers are overloaded for upside or downside protection.

The indicator compares similar call (buy) and put (sell) options and will turn positive when fear prevails because protective put options have a higher premium than risky call options.

In short, the skewness metric will move above 10% if traders fear a fall in Bitcoin prices. On the other hand, generalized excitation reflects a negative 10% skewness.

Bitcoin 60 day options 25% delta curve: Source: Laevitas

As shown above, the 25% delta curve declined between November 21 and November 30, indicating that options traders are reducing their bets on unexpected price dumps. However, it reversed on December 1 after $17,250 resistance was stronger than expected.

The delta skew, currently at 18%, suggests investors are still fearful, reflecting the interest of whales and market makers to offer downside protection.

As a result, professional traders are not convinced that Bitcoin will regain $18,000 anytime soon, which can be explained by the high correlation with traditional markets.

Until the DXY index sets a clearer direction and the S&P 500 shows strength at 4000, the trend favors Bitcoin bears.