Bitcoin bounces, Dow surges and Gold flops
Last Saturday, I posted my thoughts on Bitcoin and concluded the bubble was about to burst. This was the daily chart I showed at the time
The Elliott waves were pretty clear – the 1 September high at $4,923 was the final high of wave 5 of 5 and the Friday 8 September break of the lower wedge line was the initial kick-off to a much steeper decline. I stated that my first target was the $2,800 – $3,000 zone.
This is the updated chart as of Friday’s close
and indeed yesterday the market made a highly accurate hit on the Fib 62% (yellow) support at $3,000 (which was also chart support) and bounced hard. Isn’t that a very pretty example of how, by using simple Fibonacci levels, you can accurately predict market turns much of the time? Of course, that was a great place to take profits on shorts.
In terms of trading tactics, when markets are this fast-moving, it is best to set limit orders at a specific target, rather than ‘watch’ the market – your target may be reached while you in the land of nod! The low yesterday was $2,970 so a limit order to cover shorts at $3,000 would have captured a very tidy profit if you had acted on last week’s analysis.
The media is full of Bitcoin blow-by-blow accounts of the news developments behind this plunge (most were centred in China) – and here is a good representative article of this on Seeking Alpha.
So what now? To maintain my bearish stance, I must see a turn down early next week off my wave 4 high (there is Sunday trading) because so far, the decline is a three. A strong push above the $4,000 – $4,200 zone would shift the odds very much towards a bullish scenario.
As always, to help with my forecast, I turn ot the short term charts – here is the 10-min showing yesterday’s rally off the $3,000 wave 3 low:
On this scale, I have a potential rising wedge and a firm break of the lower blue line would likely send the market down to first support at the yellow band at $3,500. Note the weakening momentum at the second high and the A-B-C look to the rally.
Setting a sell order just below the lower blue line could well pay off, but with last week’s extreme volatility, I expect a more complex wave patterns to develop. For now, nimble traders have captured a $1,000 profit in last week’s action.
Last week saw declines in Bitcoin (and all other cryptos) and gold, which are at the leading edge of high risk assets (which I discussed last week). In the middle of the risk pyramid are equities and US shares moved sharply higher despite the most recent North Korea sabre-rattling. The FTSE broke sharply lower as the pound surged. With a still-weak dollar, US assets are more attractive.
Many experienced analysts have been expecting stock declines (or at least severe pull-backs) for some time. Meanwhile, the Dow, S&P and Nasdaq all are pushing up into new all-time highs. These bullish moves are totally at odds with bearish sentiment of the public – at least, until now.
One measure of retail sentiment I follow is the AAII weekly sentiment survey and in the past week, theer has been an almighty switch from very bearish to very bullish:
That is a 25% swing in one week! Astounding. But a one-week sample may not give a realistic picture, but I am noting it. Interestingly, this switch came at the same time as the Dow and S&P breached upper tramlines, so this sets up the possibility that a high of some sort could well arrive early next week. But suddenly, both the public and the money managers are aligned on the bullish side of the boat – and that should indicate caution for the bulls.
Latest COT shows hedge funds are now at a massive 9:1 bulls in the e-mini Dow. Hmm. I wonder just how long this low-VIX complacency can continue without capsizing the vessel.
On the other hand, yesterday’s latest North Korean missile event was brushed off with disdain. Is this a Teflon market?
This was the S&P chart I showed last Saturday:
with the view that odds favoured a break upwards above the pink trendline to new highs. This is the 4-hr chart updated:
I have placed a different and more bullish EW labels on the rally from last week’s (which remains a still valid option). Note that on Monday’s Asian opening, a surge of buying created a Breakaway Gap and the market climbed with nary a dip from then on. That was super-bullish action – and that gap gave a clear buy signal.
So now, we could be in wave 3 of 3 of 3 of 5 – an uber-bullish count. But note the very large mom div that is forming. Could this be a warning that a dip lies directly ahead? Next week will reveal much.
As gold was rallying above the $1350 level, I warned VIP Traders Club members to expect a decline and to take some profits off the table on their long trades, which were taken from the $1220 area for a tidy $100-plus profit. And last week, my forecast is panning out with gold trading down to $1320.
Part of my reasoning was the COT data that showed hedge funds were piling up masses of long bets and even in the past week, were even adding to longs on the decline. To me, this shows they remain steadfastly bullish even with a large 4.5:1 plurality of bullish bets – and are vulnerable to a more protacted decline. Here is the rally off the $1220 low
If we are in a B wave (leading to a large C wave up), then I need to see it in the form of a three. So far, we have the first leg down and a solid break of the lower tramline would set up my targets. The extreme bullish bias of the hedgies makes me inclined to suggest a turn at either the 50% or 62%. That would likely coincide with Dow/S&P surging into new highs next week.
Till next time.