Strong bounce on a weak traded volume

We saw Bitcoin making a very impressive $10,000 push higher over the last couple of weeks taking the price from around the $38,000 lows all the way up to almost $50,000, topping at $48,000. This strong 26% rally in the price of the crypto king, mainly occurred as a result of the short-term shift in sentiment among investors from a risk-off to a risk-on mode with the S&P 500 and Nasdaq rallying with 11% and 16% respectively from their lows. As you can see on the chart the up move in Bitcoin stopped at a key horizontal resistance level. The drop we saw in the price on Thursday and early Friday, together with the upward retracement of the price late Friday evening and early Saturday morning have formed a very interesting pattern, which is signaling for more downside ahead. The upward retracement stopped right at the critical 61.8% Fibonacci retracement level, forming another pin bar with a long upward shadow (tail). The top of this pin bar reached right at the level where we saw the previous reversal Pin bar and 4 consecutive inside bars formed right before the drop occurred. This signals for the existence of large number of pending SELL orders around the $47,000-$47,200 range. With the absence of any strong fundamental catalyst heading into next week and with all of the other negative risk-asset developments described below. We see the 1.618 Fibonacci Extension level of $40,877 and the strong supply zone there for BTC, together with the horizontal and upward sloping diagonal supports that also lie there for the cryptocurrency, as the next most likely stop for the price.

Fundamental Analysis

The rally throughout the last roughly 10 trading sessions was also somewhat supported fundamentally by speculations about a “progress” in the Russia-Ukraine peace talks and by the fact that the uncertainty around the pace with which the Federal Reserve plans to tighten monetary conditions in the US was somewhat removed after the Fed raised the benchmark interest rates with 25 bps in March and issued a very hawkish tone at its last meeting. What seemed to confuse a lot of trades was – “How come the Fed is confirming its aggressive tightening plan, the bond market is selling off and stocks are rallying?”.

It is a fair and logical question. What you need to remember however is that investors have been pricing a relatively aggressive Federal Reserve tightening monetary policy in 2022 ever since the Fed chair, Jerome Powell announced that the Fed will be starting with its tapering process last Fall. Thus, the popular “Buy the rumor and Sell the fact” phenomenon was flipped on its head and a new pattern called “Sell the rumor and Buy the fact” played out perfectly, in almost all risk-on assets throughout the last few weeks.

To put it simply, investors spent the months of January and February repositioning from Risk-on to Risk-Off assets in anticipation of the Fed’s rate hike and hawkish comments in March. Once the rate was a done deal and the policy stance was official, the uncertainty was no longer present and investors started rotating back into their favorite risk-on assets including stocks and cryptos. As a result we saw a very powerful oversold, bear-market rally that took out a lot of shorts, causing the price to retrace back to key former support, now resistance levels on the chart. Something that was definitely a commonly shared characteristic among various risk assets during this rally, was indeed the fact that the sharp move higher occurred on a relatively low volume, which is never a good sign as a strong divergence between price and volume movements in most cases indicates the institutional investors out there are not supporting the move.

The rally in risk-on assets aligned perfectly with a strong and sharp reversal of the Volatility Index (VIX) from the upward sloping diagonal trendline resistance at around 38. When the VIX is trading at elevated levels, this shows investors’ general fear and uncertainty in the market. Just as with every other trading instrument, however, the VIX index also moves in a trend-based manner. After being rejected around the top of the ascending megaphone pattern, the price sharply retraced lower and is now sitting at the lower end of the channel, right at the upward sloping diagonal support at around 19-20. Another move up could be expected from here for the VIX, which would once again increase the investors’ uncertainty and fear in the market, leading to another rotation from risk-on to risk-off assets.

Summary

We expect to see elevated levels of volatility in the coming weeks with another meaningful short-term transition from risk-on to risk-off assets.

  1. Unfortunately, the Russia-Ukraine war is far from being over as the two sides are very far apart on their demands. Furthermore, we believe that the most recent blowing up of a Russian fuel depot on Friday, which the Russians have officially blamed Ukraine for, – “[i]Russian Defense Ministry spokesman Igor Konashenkov said two Ukrainian Mi-24 helicopters had entered Russian airspace “at an extremely low altitude” and attacked the civilian oil storage facility on the outskirts of the city of Belgorod.[/i]” could re-ignite tensions ad possibly lead to further escalation of the war.
  2. We believe that large institutional investors who were sitting on meaningful losses on some of their high-growth and high P/E and P/S stocks have used the most recent sharp rally to distribute their holdings and limit their losses. This should lead to another sharp leg lower for this group of stocks next week.
  3. The China-Taiwan situation is heavily downplayed as another critical geo-political risk by the markets. Any signal for a potential inflation of tensions there, could also weigh heavily on all risk-on assets, thus leading to a major sell-off in the market.

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