In mid June, I wrote an article highlighting the important zones of play for Bitcoin. The major zones being $71,466 to the upside, and $61,832 to the downside.
The chart above shows the price action of Bitcoin at that time. It was Fed week, and Bitcoin was bouncing at the interim support zone. In that article, I provided intraday entry setups for those trading this market.
Unfortunately for the bulls, triggers for a move lower are being met.
And this could have ramifications for the entire stock market.
Long time readers know that Bitcoin acts as a risk on asset. Meaning when things are fine and dandy and there is no fear, money runs into risk assets such as stocks and cryptocurrencies. When things are not so fine, and we get some fear, we tend to see a risk off asset with money moving into bonds and/or the US Dollar. A risk off environment sees a sell off of risk assets.
Now some may argue with Bitcoin being labelled a risk on asset, but years of price action would beg to differ. I would say Bitcoin can provide an important indicator for traditional risk on assets (primarily stock markets) ever since the Bitcoin ETFs began trading. It isn’t only Main Street that is trading Bitcoin. Wall Street is as well.
Thus, moves in Bitcoin can provide a good indicator of the risk sentiment for stock markets. For those who trade the markets on a daily basis, remember that Bitcoin is traded 24/7.
So what has Bitcoin done now?
Bitcoin is trading at the critical support zone at $61,529.
If we reverse a bit to my highlighted interim support in blue, the level I gave readers a few weeks ago, we can see a successful breakdown AND retest before price tanked. This is the way I play markets: I wait for the retests of breakouts or breakdowns before committing my money. This gives me high probability trades… a reason why I am still in the trading game after 8 years.
Bitcoin closed below our major support level and the price currently is seeing a retest. Note the current daily candle is showing a wick at the top portion of the candle. Indicates sellers are stepping in.
Let’s take a closer look at this level:
The intraday is showing that the bulls may be able to squeak out a false breakdown. The recent two intraday candles show a breakout but no momentum higher on the break as of yet. A major red candle here on the 1 hour chart breaking below $60,973 would lead to a successful bearish retest gaining steam.
This is for the traders. I personally recommend watching the daily charts, so bulls would want to see a strong green daily candle pushing back above the $61,529 zone.
Bitcoin is on watch, and the breakdown may indicate a risk off environment meaning a sell off for stock markets.
Both the S&P 500 and the Nasdaq have broken out into new all time record highs and could make a move to retest support lower which I have highlighted with the blue boxes and dotted red lines.
The Dow Jones on the other hand is retesting a support level it just broke out of yesterday. A close below would be bearish.
The Russell 2000 is also battling here at major support. A trendline providing resistance for the small cap index.
The stock markets are looking like they want a further pullback. If Bitcoin confirms a successful bearish retest, expect the markets to drop on a risk off environment.
Speaking about risk off, let’s take a look at the US Dollar and bonds.
The US Dollar is following momentum on a successful breakout and a retest of 105.25. The Dollar can climb higher as long as it remains above 105.25. The 106.50 zone is the next resistance. The Dollar currently is in upside mode.
I am closely watching bond yields. The current market narrative is all about interest rates and how many cuts are coming. Yields should be heading lower. BUT the Fed did say they only expect one cut this year. Not as dovish as markets were expecting.
Both the 10 and 30 years are testing KEY support zones. A breakdown would be stock market positive. But yields have been ranging here for days. A bounce from here would see yields climb and this would add more to the drop in risk on assets.
In summary, watch that daily candle close on Bitcoin today. We have the breakdown, and the retest is currently occurring. There are many signs that we are about to see a market pullback here.
Happy Trading.