Friday, 9 April 2021

Bitcoin: Is BTC Waiting For Stock Market To Correct?

There're many technical reasons for BTC to fall out of the rising wedge pattern lately, but it's not happening (see chart below).

First, let's look at the reasons i expect the correction in BTC.

#1.  This is a rising wedge with falling oscillators - a textbook bearish technical pattern.

#2.   Prices having problem even getting up to the upper wedge.

#3.   Prices are very extended based on history. It's time for a healthy mean reversion. This is just a correction within an uptrend. Not the end of a multi year top.

#4.   This is the more interesting point (because nobody - that i know of - is talking about this). I think it's waiting for the stock market to pull back.

If you look at the following chart where the candle curve represents the BTC chart while the orange zigzag line represents the stock market SPY chart (with prices on the left axis).

As you can see, they correlate very well. No correlation is perfect. In fact, if they do, you should think something fishy is afoot. And this is a very good example of a real world tight correlation between BTC and SPY.

(Click chart to enlarge)

I expect BTC would break below the lower wedge 2 days ago on 7 April. It didn't. Although it didn't exactly put in a strong bounce. It did bounce however.

I think we need the stock market's pullback for this bearish H&S to break below its neckline, (which happens to be the lower wedge), given their close correlation at the moment. SPY has been making higher high. Despite this, BTC isn't making higher high. This is another check mark for the BTC bears.

I expect SPY to start its pullback next week or after (something in the 3% ballpark), and BTC may have the excuse they need to break down from this rising wedge.

The correction in the stock market would probably come in 2 stages. The first one may cause SPY to drop 3 - 4% next week, and then next one in May (latest June) would complete the 2nd stage with a 7 - 12% correction. This should cause BTC to correct 20 - 40% altogether. My range for BTC is large because of its highly volatile nature of this market.

We then know how well they correlate with each other.

The correlation should come at no surprise in the last few years. Before 2015, BTC community were made up of almost entirely of HODL'ers. So there shouldn't be any correlation between the BTC and stock markets. Especially in the last pandemic year where retail traders have increased in droves. Staying at home measure lead to a lot more short-term day trading.

Since then, more and more stock traders started to trade BTC to the point that i think there're more numerous BTC traders than there're HODL'ers.

The 60+% crash in BTC market during Feb - Mar 2020 when SPY corrected 35% is telling you that unambiguously. And these two markets crashed and recovered practically the same time. These can't be coincidences. They aren't independent markets.

We don't know if these correlation would hold in the future. The correlation would break in a situation  when BTC starts its bear market while SPY is still in bull market, and vice versa. For now it appears they do.

Ok, let's wait to see if this would turn out to be the case soon enough.