Market Bottoms & Tops All About Sentiment

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With Bitcoin showing a nice impulse swing higher, there is some evidence that we may be near or printed a bottom.  Sentiment is low which is where turning points in the market often happen.

Stocks continue to move higher, but this is starting to get a little frothy with a lot of late money flowing into equities.  Sentiment is starting to push higher and this is where you want to build up some additional cash for a pullback.

The Dollar has been grinding higher over the past year, but we are now seeing some signs of a reversal and this should bode well for Gold.

Fundamentals may be a guide for what equities you want to buy, but sentiment is what drives markets in the shorter term.  Long term we are bullish on Stocks, Bitcoin and Gold, but like the weather markets cycle.

Most of the time the herd is driven by what is “in play”.  For traders this is where you want to look for, not markets that are out of play.  For investors you want to buy  when markets are out of  favor, but often it takes time for the cycle or market sentiment to rotate back.

This is why it is important to exercise patience.  When you get that feeling of hopelessness and are wanting to sell, that is generally the time to buy and vice versa!

BTCUSD Monthly

Cryptos in general have been out of favor with the market.  Since July we have seen sentiment slowly dwindle to a point that Bitcoin is pushing back into the 2018 support level around 6000.

So it is not a big surprise we are trading at these levels, and there is some room to push lower, but sentiment is starting to get overly bearish again and this is where turning points often happen.

Though the chart may look bearish, it is not as bearish as most would think.

The broader chart is always our initial guide for investing.  Wave ones are tricky as we never know until the previous high is taken out whether this is part of a broader correction or the initial leg higher of a broader market move.

With the broader trend still in tact we are not going to go against the trend.  If this were the perfect bullish market we are exactly where we would expect to be at this point in the cycle.

We have a broader higher low and higher highs from the peak in 2014 to the peak in 2018.  We have an interim swing higher that took out previous support / resistance and pulled back off a traditional resistance area.

The key area here is 6k or 5850 for those looking at an exact level.  As long as price action does not take out this level we stay with the broader trend assuming this is a wave 2 of a broader move towards a new high.

However if we do take out this key level, it may imply we are still  in a very broad corrective cycle and a retest of the low which overlaps with the 61.8% extension of legs A & B.

In order for us to add new capital to this market we need to wait for confirmation one way or the other, and right now we are simply at an inflection point.

Bitcoin Montly

BTCUSD Weekly

When it comes to EW and Fibb I am not a purist, I use it to gain some perspective of proportional levels of the market to look at.   The key level to take out is 11,500 and the key level to hold is 3250.  There was a lot of action around these levels from the monthly perspective.

The 6400 level is the 61.8% between the 3250 & 11,500, which overlaps with several other levels such as the 6250, 6000 and 5800.  In short we should see buy side orders in this area and so far we have.

The risk to the downside is the market pushes through this area, and this is where the probability of a retest of the low comes in.  Calling for a retest of the low above the 7450 level is just throwing out numbers based on guessing.

Historically, theses levels were attractive for buying, even though we did push lower last year, it recovered and more than doubled off the 6000 level.  There is a level around 5000 that offers support, but if we take out the 6000 area, the probabilities lean heavily for a retest of the low, or at least a push under 4k.

Yet this may never happen.  We have a minor double bottom on the weekly, and if we get a Bullish reversal pattern in the form of a Pinbar (close above 7250), evidence would support buyers are stepping in where we expect them to from a bullish standpoint.

Though many are calling this a bearish market, until we take out 6000 it is not as bearish as one might think.  We can draw a simple channel often referred to a bullish flag, where the upper and lower boundaries have not been taken out.

We consider this a consolidation NOT a bearish trend.  Taking out he 6000 level would change our minds in the mid term, but not the broader thesis.  For us to consider this a broader bearish market 3000 would have to be taken out.

Now these are some large swings, but Bitcoin is known for large swings, making this a highly risky market.  If you do not have the stamina, or ware-with all to take this type of pain, this market is not for you.

Trying to time all the swings will lead to portfolio erosion over the long haul, best to just hold through the noise and if we push into an extreme area, have the Grit to step in and buy.

Bitcoin Weekly

BTCUSD (Daily)

On the shorter term chart, things are starting to look bullish here.  As mentioned above we have a double bottom, but more importantly a strong impulse swing that took back nearly 5 days of losses.

The current consolidation is above the 50% retrace of the mother bar, and this again sets up for a continuation higher.  The key level to take out on the daily is 7450 and the key level to hold is 6500.

In addition we had a wedge pattern that is often a sign of accumulation, but the lower boundary was taken out.  We considered this bearish at the time, but the fact it took back the lower boundary and tested the upper boundary provides insight that this was a fake-out that evolved as a “pullback”.

Technically taking out the upper boundary of the wedge would be very bullish and sets up for a swing back into the 8000-8500 area.

From a swing trading perspective, we want to see price hold above the 6800 level or 7000 area.   No doubt there is a lot of resistance between here and 11,500 so it could take some time (2-3 months) for it to push back into these levels.

However, Bitcoin is notorious for large rallies like the one we saw in late November.  This is a little suspicious that larger operators may have some insight us retail investors do not.  More evidence?  Well lets take a look at long interest.

BTCUSD Daily

Long & Short Interest

Ever since Bitcoin has started pulling back in late October, Long Interest in Bitcoin started rising.  The selloff in November, did not flush these longs out, they actually started buying more and more Bitcoin.

Remember larger players are much more sophisticated than retail investors.  They are not leveraging 100-200 to 1 at least not in this market.  Unlike the S&P or Nasdaq futures, the price movement in Bitcoin can be 10-20% or more in a single day.

If I were leveraging I would be looking at a 3-1 or 4-1 margin at most.  This requires a 25-33% selloff before getting closed out.  Preferrably the 33% or 3-1 leverage would be perfect, but lets look at 4-1.

Most of the buying was around the 7200 level implying that as long as price stays above 5400 there is not going to be a run for the exit or liquidation long squeeze.  At 3-1 the price to liquidation is around 4800.

With longs not being liquidated during the selloff we are assuming these are more sophisticated larger players, not your retail trader.  They would have been liquidated quickly as a 25-1 margin only requires a 4% move in the equity to liquidation.

Notice how quickly shorts were liquidated during the swing off 6500 which was only a 1200 pt move.  Longs never winked in fact they continued to buy.

The real risk is the market makers that are taking the other side of the trade, and often this can be the brokers themselves.  A push into the 10,500 could easily bankrupt some of these exchanges and who would be the benefactor?

Long & Short Interest

Main Stream Bitcoin

If Bitcoin really had no future the likes of the NYSE (through Bakkt) and the CME Group would not be expanding products.  Bakkt volume is growing and both the CME and Bakkt are offering or are soon to offer options.

Who cares right?  Well that would be a layman point of view.  Options provide a method on which one can hedge a position with buying insurance.  Nothing like buying a brand new Lambo and not getting full coverage right?

We often use options to hedge our stock positions be either selling Calls or buying Puts.  This provides more security for hedge funds and larger institutions to enter the market.  Buying 200-300 Bitcoin has the risks of seeing your yearly performance get hammered if you can not hedge.

Sure you can buy or sell futures contracts, but options is a much better way to hedge as you can give up some small gains, to lock in profits.  With futures you are simply taking a neutral position or slightly bearish / bullish position and often it is just a portfolio killer.

If you think the likes of NYSE and the CME Group are investing millions, likely 10’s of millions to offer new products, and Bitcoin is dead, you are simply ignoring the obvious.

This is one step closer to a Bitcoin ETF, and or ETN which is more likely to be introduces sooner than later.  When Auntie and Grandma can buy an ETF through any broker, you are going to miss the train unless you are already positioned.

For this reason we do not mind holding our inventory through these cycles when Bitcoin is simply out of favor with traders.  There is a lot of reason to be bullish in the long term, and at these prices adding a little to your long term portfolio is likely to pay off in the long term.

S&P

Stocks are now in full rally mode after positive economic data, a potential Phase 1 trade deal, and impeachment hearings likely to be nothing more than political drama.

However markets that move have an exponential swing like the current one, are generally not sustainable.  A couple months ago there was a lot of pessimism in the market, and it continued to grind higher.

We mentioned at that time that until the market becomes more optimistic we can easily grind higher which it did.  However now sentiment is starting to become a little more frothy with many late to the dance.

Yes during the period of pessimism, larger players were accumulating and many may have had additional insight into a potential trade deal, FOMC decisions etc.  Yes this happens and it is part of the game.  We do not have that access so we rely on order flow as a guide.

When sentiment is low, and price keeps moving higher, someone is buying!  Now everyone is jumping on the bandwagon and though we do not mind adding a couple quality undervalued stocks, we are also trimming out some losers, and taking profits on some big movers to build up our cash positions.

Though we do not depend on the RSI, it is definitely in overbought territory.  Now you have heard me say, it does not mean alot on face value alone, but taking into account we have not had a significant pullback (5-10%) and have two overbought conditions as the market continues to move higher is evidence that we are nearing a top.

This leg higher is also nearly vertical and vertical swing like this are not sustainable.  In addition, the market is up nearly 12% from levels where we seen a lot of action since August.

Now there is still some room to run, but this is an area where we want to build up some cash for a potential swing back into the 2800-3000 area.  We are not bearish, but eventually funds start to lock in profits, and going into the first of the year, everyone likes to send out their statement of how much they made.

Why take that risk here?  Also we are going into a historically seasonally bearish cycle around February.  Now like the weather, winter sometimes comes early, and others comes late.  Yet when do you prepare for the snow?

Do you wait for the first snow fall, or start preparing in advance?  With sentiment starting to become overly bullish, a market gone vertical, and everything smelling like roses, well we are preparing for the inevitable pullback.

The 3250 level is the next significant area to look for a bearish reversal, and it is likely to come out of nowhere.  Any negative news can be a catalyst for market sentiment to change, however, markets can also stay over bought for a period of time.

How we are handling this in our model portfolio is, we do not mind buying some undervalued equities that are trading off their highs as long as we retain a decent cash position if and when the market pulls back.

 

Stocks

XAUUSD

Gold like Bitcoin has been consolidating since August.  Technically there is a potential bearish flag that may play out, but trading on a pattern that may form randomly, as markets consolidate can often be misleading.

Momentum in the broader perspective is still bullish and the proportionality of wave 4’s pullback is equal to wave 2’s at around 6-7%.  This provides some perspective as to where buyers are stepping in with broader consolidations.

Nothing bearish about this chart what so over, however we are on market time not our time.  The key level to take out in the short term is 1485 with the key level to hold 1440.

Technically, from and EW standpoint, Gold can pullback to the 1350 level and still be in a broader wave 1 cycle. With the upcoming election in 2020, and a overly optimistic equities market, we are looking for another swing higher into the mid to upper 1600 area.

Even with the positive economic numbers & phase 1 trade deal, Gold is holding its own.  By most accounts it should be pulling back and its not, which may be a sign larger players are rotating out of stocks slowly and into more risk off assets like Gold.

I like Gold here and if it pulls back I would add some more, along with physical there are a couple Gold stocks we are in right now.  Never hurts to buy Gold, but remember, it is generally a slow mover, but when it does the moves are pretty powerful.

GOLD

DXY

The US dollar Index has been in a slow grind higher but current price action is pointing to a potential inflection point but it is still early so a tough position for Forex US pairs.

We have a lower high near off the 100 resistance area and price is starting to show order flow out of the Dollar.  Yet we do not have a lower low yet and the interim push below 97.0 could be a failed low situation.

What we are looking for is a push above 98.50 and a potential retest of the previous high or new high, or a decisive push through 97.0 implying a top is likely in.

From a position trade standpoint a break of 97.0 should trigger some selling pressure and a push back into the 94.0 – 95.0 area.  With the Dollar failing to take out the 100 level and looking a little bearish right now, we are looking to short the dollar.

The 97.68 level is about the 50% retrace of the prevailing swing and is a good area to look for shorts for swing traders.

Dollar Index

SPCE

Virgin Galactic (SPCE) was our radio / podcast trade of the week last week and up 16% since the close Monday.  Though momentum is still to the buy side, we want to see some profit taking here before looking to add to our longer term portfolio.

In short this was a rare trade where the stars simply aligned, and we would be taking profits here if you took this as a swing trade.  Love the underlying thesis of the stock with their hyper sonic jet engine which is really fueling the rally here.

Back in early December we bought an initial position in the 7.00 area as momentum was still clearly bearish, yet we like investing in visionaries such as Sir Charles Branson.

We are not buying into this rally though it may continue and will either look to add to our long term position on a pullback or we can always look to trade into a position and keep the profits as shares.

This is a 5-10 year speculative stock similar to what Tesla was 10 years ago.  It is not a core holding as any setbacks are going to weigh on the stock heavily.  However with great risk comes great rewards and this may be one of those, “I wish I bought some 10 years ago” type stocks.

For those with no exposure or looking for additional exposure (as we are) a pullback into the low 9’s would be an area to add a small position.

Virgin Galactic

Summary

Have some patience and do not get caught up in all the drama surrounding markets.  Often moves do not happen when we want them, but when we get frustrated and want out.

If you want to trade, it is also important to trade various markets.  When markets are out of favor trading is tough like with cryptos.  However a market in favor like stock equities has provided several opportunities that we have been taking.

Yet markets cycle and when sentiment is overly bullish or overly bearish it is often the sign of a turning point.   I think several markets are at turning points, Bitcoin has a lot of bearish sentiment around it, yet we see larger players investing 10’s of millions into new products.  Sounds like Bitcoin is dead.

On the other hand, everyone is rushing into the stock market, and though we have been adding to our portfolio, making a couple position trades, we are also trimming out building up a cash position for when the market eventually pushes lower.

What lies ahead?  That’s anyone’s guess, all we can do is position ourselves for different scenarios.

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