Global Liquidity Market Regimes

Understanding Liquidity Market Regimes

What are Liquidity Market Regimes?

Liquidity Market Regimes combine Bitcoin price action with global liquidity dynamics to identify the current phase of the market cycle. The indicator calculates a liquidity-adjusted fair value band for Bitcoin and measures how far the actual price deviates from this band. The resulting "regime" value is then smoothed and compared to its historical average to classify the market into one of four distinct states.

How It Works

The calculation involves several steps:

• Liquidity Influence: A 7-day percent change in global liquidity is calculated and smoothed over 27 days, then multiplied by 10 to determine the liquidity influence factor.
• Fair Value Band: An 80-day simple moving average of Bitcoin is adjusted by the liquidity influence to create a "fair band" that represents liquidity-adjusted fair value.
• Oscillator: The ratio of Bitcoin price to the fair band is calculated and smoothed over 7 days.
• Regime: The oscillator is compared to its expanding historical mean. The difference between current oscillator and mean defines the "regime" value.
• Regime MA: A 10-day moving average of the regime serves as a dynamic threshold for zone classification.

Four Market Regimes

The indicator identifies four distinct market regimes, each with unique characteristics:

• Bullish (Dark Green): Regime value is above both the regime MA and zero. Bitcoin is significantly overperforming relative to liquidity conditions. Historically marks strong bull market phases with expanding liquidity.
• Correction in Bull (Light Green): Regime value is between the regime MA and zero (positive territory). Bitcoin is correcting but remains above fair value. Often represents healthy pullbacks within an ongoing bull market.
• Correction in Bear (Light Red): Regime value is between zero and the regime MA (negative territory). Bitcoin is below fair value but showing signs of stabilization. May indicate bottoming processes or bear market rallies.
• Bearish (Dark Red): Regime value is below both zero and the regime MA. Bitcoin is significantly underperforming relative to liquidity. Typically marks deep bear markets or capitulation phases.

How to Use This Indicator

Traders and investors can use Liquidity Market Regimes to:

• Identify Market Phase: Quickly understand whether Bitcoin is in a bull market, bear market, or transitional phase based on the current regime color.
• Risk Management: Adjust position sizing and risk exposure based on regime. Bullish regimes support larger positions while bearish regimes warrant caution.
• Cycle Timing: Watch for regime transitions as potential entry/exit signals. Transitions from bearish to correction phases often precede new bull markets.
• Context for Price Action: Understand whether current price levels are justified by liquidity conditions or represent overextension/undervaluation.
• Long-term Planning: Use historical regime patterns to set expectations for cycle duration and magnitude of moves in each phase.

Interpretation Guidelines

While the indicator provides clear regime classifications, consider these nuances:

• Regime Transitions: Pay special attention when regimes change, as these often mark important inflection points in the market cycle.
• Duration in Regime: Extended periods in extreme regimes (very bullish or very bearish) may indicate approaching reversals or regime changes.
• Confluence with Price: Use regime analysis alongside traditional technical analysis and support/resistance levels for confirmation.
• Liquidity Context: The indicator works best when global liquidity trends are clear. During transitional liquidity periods, regime signals may be less reliable.
• Historical Patterns: Study past cycles to understand typical regime sequences and their implications for future price action.

Key Parameters

The indicator uses the following parameters:

• Liquidity Change Period: 7 days - measures short-term liquidity momentum
• Bitcoin SMA: 80 days - establishes medium-term price trend
• Liquidity Influence: 10x multiplier on smoothed liquidity change
• Liquidity Smoothing: 27 days - filters out noise in liquidity data
• Regime Period: 10 days - smooths regime classification for stability

Data Sources and Updates

Global liquidity data is sourced from central bank balance sheets and updated regularly. Bitcoin price data is synchronized daily. The indicator covers data from 2016 onwards, providing multiple complete market cycles for analysis. All calculations are performed using the expanding mean methodology to avoid lookahead bias.