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Yesterday we finally got the first tentative break we've been waiting for over a month now.

Last week we wrote that "the biggest obstacle for crypto remains the USD - where we think the market is heavily positioned to the short side and vulnerable to a short squeeze, which could take BTC/ETH and Gold lower in response."

During US hours yesterday, a sharp USD short squeeze took place - which came in the face of bad US data this week and sharply lower US Treasury yields across the curve.

Typically when such a counter-intuitive move happens, it often signals a change in the near-term trend, and even more so when positioning is heavily one-sided and lacking conviction.

However, we say 'tentative' because the major key level for the USD's trend change confirmation has not broken yet, and recent Fridays have produced some irrational flow-driven reversals in macro markets.

In DXY, we had a sharp breakout of the first falling wedge yesterday, and are currently testing the second falling wedge here that has capped us since the October top. We continue to be biased towards a double bottom break of 102.5. The strong positive divergence in momentum indicators argues for such a reversal, but a break of this very key level is still needed to have us focused higher.

We see USD strength as the main reason capping BTC, which has led to the market's reflexivity blaming known bearish factors such as the large upcoming supply from the US government and Mt. Gox.

In BTC, this week's sell-off has taken us through the head and shoulders trendline, but where a close below 26.5k is still preventing a larger breakdown. BTC has a negative divergence on momentum indicators which is leading us to similarly be biased in the near-term towards a break lower, first to the 25k mark and then potentially to the 20-22k level. However we view this lower level of 20-22k as a high conviction medium-term buy zone, and a level where we have sold physically settled puts before.

What we need for this near-term move lower to have legs to the downside however, is a sharp increase in volatility. Chart 3 shows VIX (blue) vs. USD (purple - inverted) vs. BTC (yellow - inverted), whereby an increase in volatility has driven strength in the USD and sapped risk assets such as BTC.

While the outcome of Washington's political drama is impossible to predict, we will be following the market's reflexive function - especially in relation to implied volatility across assets. This now holds the key for us in determining the next trend direction.

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Disclosure: The authors of this content and members of Nansen may be participating or invested in some of the protocols or tokens mentioned herein. The foregoing statement acts as a disclosure of potential conflicts of interest and is not a recommendation to purchase or invest in any token or participate in any protocol. Nansen does not recommend any particular course of action in relation to any token or protocol. The content herein is meant purely for educational and informational purposes only and should not be relied upon as financial, investment, legal, tax or any other professional or other advice. None of the content and information herein is presented to induce or to attempt to induce any reader or other person to buy, sell or hold any token or participate in any protocol or enter into, or offer to enter into, any agreement for or with a view to buying or selling any token or participating in any protocol. Statements made herein (including statements of opinion, if any) are wholly generic and not tailored to take into account the personal needs and unique circumstances of any reader or any other person. Readers are strongly urged to exercise caution and have regard to their own personal needs and circumstances before making any decision to buy or sell any token or participate in any protocol. Observations and views expressed herein may be changed by Nansen at any time without notice. Nansen accepts no liability whatsoever for any losses or liabilities arising from the use of or reliance on any of this content.