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Bitcoin is still in “risk-off” mode. And, that’s a problem for the bulls.
Admittedly, I’ve been leaning more bullish than bearish over the past couple weeks. The small cap stocks look setup to lead a year-end rally. The Volatility Index (VIX) generated a buy signal. And, the action in the financial sector – which often leads the broad stock market – has been bullish over the past few weeks.
There are plenty of reasons for traders to expect a year-end rally.
The one glaring problem, though, is bitcoin.
The King of Cryptocurrencies shifted into “risk-off” mode earlier this month. Until it shifts back to “risk-on,” it’s hard to get bullish on stocks. And, at the moment, the setup in bitcoin looks bearish.
Here’s the chart…
Bitcoin peaked in early October. It has been trending lower ever since. The decline has pushed bitcoin below its various moving average lines. And, those moving averages have shifted to a bearish formation – with the 9-day EMA below the 20-day EMA, and the 20-day EMA below the 50-day MA.
The momentum indicators at the bottom of the chart have been declining right along with the price of bitcoin. This confirms the downtrend.
A similar setup in late May led to a fast, 20% decline in bitcoin. If we get the same sort of action this time, then the King of Crypto is headed towards $65,000.
It will be hard for the broad stock market to rally in that environment.
Bitcoin is the stock market’s canary in the coal mine. When it’s rallying, investors are in “risk-on” mode. They’re willing to speculate, to take on risk, to aggressively buy stocks.
But, when bitcoin goes “risk-off” investors pull back. They trim positions, raise stops, and are reluctant to put new money into the stock market.
The canary started coughing a few weeks ago. Since then, the S&P 500 has declined 2%. The Nasdaq 100 (QQQ) dropped 6%. And, the semiconductor sector (SMH) fell more than 10%.
If we’re going to get a year-end stock market rally, then bitcoin needs to turn higher. Until that happens, any strength in the broad stock market will likely prove temporary.
Best regards and good trading,
Jeff Clark
Editor, Market Minute