Fed pivots, crypto contagion, and stock rallies, oh my!
Just what are the markets doing?
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The U.S. Dollar
The key to all markets remains the dollar. Simply put, if the dollar is rallying then markets are more likely to be risk off. But if it declines, then the opposite is generally true. So, where does the dollar stand today?
When we zoom out to the monthly chart, eliminating most of the noise, we can see a pretty well-established rejection at the multi-decade descending resistance. Sure, the dollar broke out just beyond it, but it went no further. Then, last month, it printed a small doji with a lower high. And this month sees a large supply candle spread as the dollar attempts to find support around the monthly R3 pivot - the summer’s mid-range.
The lack of follow-through on the breakout leaves this picture more bearish than bullish at this time. Those of you who have been following me for a few years may remember me calling the January 2021 low when it printed and then giving the ~114/115 area as the target, which is exactly where the dollar has topped out. As such, there is no real surprise in seeing it rejected at that area. The much more important question is whether that was THE top, or merely a temporary top on the road to the ~122 area.
The high-volume node (HVN) around 95-97.50 is the test. Breaking down below that level significantly increases the odds that THE top is in. This would align with a potential Fed pivot leading to quantitative easing (QE). Dollars flowing into the economy via QE will lead to a risk-on environment for market participants as dollars enter the market en-masse once again. For now, the expectation is a slowdown with a 50 bps rate hike in December highly anticipated by the market. Be sure to pay attention to Friday’s Jobs report. My thoughts have not changed so I tend to agree with this Bloomberg article in that we will see a continued slowdown of hiring and wage growth which will give the Fed support for the idea of slowing down their rate hikes.
The Dow Jones Index
If we switch our attention, now, to the Dow, we will notice that it has rallied to retrace 70.5% of the decline off the all-time-high (ATH). In doing so, it has breached the August 16, 2022 resistance level at 34281.36. This is important because the decline from the ATH now appears to be in three waves - a five-wave leading diagonal from the ATH to the June 17, 2022 swing low, followed by a three-wave counter-trend rally to the aforementioned 34281.36 level, which is, then, followed by a possible five more waves down into the October 13, 2022 swing low. In Elliott Wave Theory, a three wave pullback is corrective and results in continuation of the primary trend. This would suggest that a rally into a new ATH is forthcoming.
But that will have to wait. For now, it looks like we could see price pulling back toward the daily pivot area at around ~31400/31450. If we get a reversal in that area, this would set up a minimum expected rally into the ~42280 area. Therefore, there is much potential upside still left in the stock market.
When we take into account that many of the tech stocks have already retraced over 70% from their ATH, it seems that some sort of rally higher is due. It doesn’t make much sense that the decline is only beginning with the indexes, but tech stocks are as beaten down as they are. They have little room left to fall further. So, when we consider that the Dow’s ATH is supposed to be a grand super cycle top (in Elliott Wave terms) which means a fifth of a fifth of a fifth, etc., wave then we should’ve seen a blow-of top due to the excessive excitement. But we didn’t see that, which leaves the current ATH suspect as THE ATH.
Zooming out to the monthly, we can note that October 2022 printed a large bullish candle that carried the index almost into the monthly pivot. So far, this month, we have reached that pivot level. An impulsive breakout above it should signal that a new ATH is incoming as previous mentioned.
There is quite a story to be told over the course of Bitcoin’s 12 year existence. Maybe none more painful than this past year, however, where greed and leverage has produced significant losses for investors and traders who had their money and/or crypto tied-up in the likes of Celsius, Voyager, 3AC, Luna, TerraUSD, BlockFi, and FTX, just to name a few. As a result, retail market participants are very bearish. Who can blame them? But, therein lies the rub. It’s when the greater number of market participants (the crowd), in general, believes that price absolutely must fall further that we usually see a bottom form.
We can see a large rejection at the ~$69,000 ATH that has carried price down into the $15,000s so far. Locally, the weekly chart shows what may be a terminal shakeout two weeks back that broke down below the previous four-month-range which began with the capitulation into the June 18, 2022 swing low.
And now there’s talk of miners capitulating this evening but rather than fall, Bitcoin has rallied.
Breaking out above 16588.46 (on Coinbase) would signal that we are likely to see a rally up to, and beyond, the hourly R1 pivot. The daily candle is currently bullish engulfing which will signal a pause/potential reversal of the downward trend off the November 24, 2022 swing high.
But the daily candle is only a few hours into the making, so there is still too much time left to be sure about anything on that daily time frame. Even so, traders should be paying attention because the price action on the shorter time frames appear to be setting up a continuation off the rally off the November 21, 2022 swing low.
As we can see, the dollar appears to be topped out. A declining dollar takes the downside pressure off the prices of other assets. Does that mean that those asset prices can’t continue lower? Not at all. But it does mean that the more likely response will be to see those asset prices rise. And, yes, this includes Bitcoin as well.
At the top, market participants generally tend to euphorically believe that price won’t ever stop rallying higher. It’s the opposite at the lows where participants becomes depressive and can’t see how price could ever turn around. So, while there are technical targets lower down for Bitcoin, there is a lot of reason to believe that a bottom may currently be in progress since June of this year with the recent drop on November 9th being nothing more than a heavy spring or even terminal shakeout in Wyckoffian terms. If so, then the range that has developed since then is to be expected. But in this scenario, price really needs to start rallying more impulsively soon and breakout back into that large range above the 17567.45 June low. With that in mind, further Bitcoin breakdown will have me looking at an initial target in the ~14,100 area.
This is my first newsletter after a year, so I am a bit rusty. Give me a few weeks to get back into the groove and we will soon be diving deeper into the markets and the concepts being thrown around social media. That way you can become a more knowledgeable trader.
My Streaming Schedule
I stream simultaneously on YouTube.com/texaswestcapital, Twitch.tv/texaswestcapital, and Twitter.com/txwestcapital on Tuesdays and Fridays at 11:00 a.m. CST. I’d love for you to stop in and share your thoughts about the charts. We usually look at everything from Bitcoin to stock indexes, Forex to precious metals, oil and gas to individual stocks and crypto pairs as well as the DXY. And of course I do my best to explain the macro events and what they likely mean, which is often much different than the usual large social media influencer accounts.
Awesome Chris, thank you!
Good read! You might enjoy our post from this morning.