Bitcoin’s price action has become increasingly dependent on that of the S&P 500 over recent months.
The correlation is so strong that it has been observed by analysts who do not actively watch the cryptocurrency space, such as a team at JP Morgan. Data shared by analysts suggest the correlation between these two markets is at all-time highs.
Chart of BTC and SPX from TradingView.com
Although some have made the argument that this trend is bullish for Bitcoin, stocks are printing potential reversal signs. Should the correlation continue to hold, any correction in the stock market could spell disaster for cryptocurrencies.
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Bitcoin Could Suffer as U.S. Stocks Print Reversal Signs
Since the lows of March 2020, stocks around the world have marked explosive comebacks. Due to a combination of positive economic indicators, monetary stimulus, and increased retail participation, there are now companies trading higher than they were in February.
Take Amazon, for instance, which passed $3,000 per share earlier this month in a historic fashion. There’s also Tesla, which now has a market capitalization of around $300 billion, making it one of the world’s largest public companies.
Stocks may soon suffer a retracement, though, according to Thomas Thornton. The CEO of Hedge Fund Telemetry, who predicted Bitcoin’s 2019 bottom of $6,400, shared the chart below on Jul. 23. Attached was the comment:
“$SPX and NYSE Composite advance-decline cumulative breadth with upside DeMark sell Countdown 13’s. Price reversals after these signals have been good over the years.”
Chart of Bloomberg's cumulative advance-decline line for the S&P 500 with the TD Sequential from trader Thomas Thornton.
The chart suggests that a derivative of the S&P 500 is printing the exact same sign seen prior to the index’s 40% crash in March 2020.
The Nasdaq has printed a bearish sign of similar importance. Financial research firm Sentimentrader commented earlier this month that the Nasdaq 100 index just printed the exact same signal last formed at the peak of the Dotcom boom:
“The Nasdaq 100 rallied more than 2% intraday to set an all-time high, then reversed to close down by more than 1%. It’s done that twice. Today was one. March 7, 2000 was the other.”
The Federal Reserve Will Save the Day?
Despite these harrowing signs, the Federal Reserve and the U.S. government may be able to prevent another stock market decline.
U.S. Treasury Secretary Steven Mnuchin said this week that the next stimulus bill will start at $1 trillion. And the Federal Reserve is expected to deliberate on more monetary stimulus for the economy in the weeks ahead.
Any move to inject more capital into the economy, either through fiscal or monetary measures, could help boost stocks.
Featured Image from Shutterstock Price tags: xbtusd, btcusd, btcusdt Charts from TradingView.com S&P 500 Prints Signal Seen Before March's Crash: Will Bitcoin Suffer?