The Market Direction Model (MDM) moved to a CASH signal on Monday, November 22nd before the S&P 500 and NASDAQ Composite Indexes posted ugly outside reversals at their highs on the same day and have since broken lower. The emergence of a new mutant strain of the Coronavirus served as the catalyst for what was already a developing sell-off, and many leading stocks had already been breaking down sharply before Friday's carnage. The question now is just how serious this new variant is and whether the action on Friday has reached a near-term climactic stage or is just the beginning of a deeper sell-off. In any case, it brutally exposes the myth about this time of the year being "seasonally favorable" for stocks. If history is any guide, past pandemics often yielded new viral strains which were typically milder than than the pandemic, thus all pandemics die out as the human immune system learns to cope with the new virus along with its mutations. Nevertheless, mainstream media can stoke the fears of the masses thus a deeper selloff in the markets would not come as a surprise. Ultimately, this is bad for fiat as reinstated lockdowns and restrictions further choke supply chains and hamper economies forcing central banks to keep the printing presses rolling. More QE is good for bitcoin, hard assets, and stocks, but in the short term, we could see deeper corrections take hold depending on the perceived seriousness of the new virus strain.
While some may try to ascribe magical properties and big "sure thing" price targets to crypto-currencies the reality is that something like Bitcoin ($BTCUSD) is still nothing more than a speculative asset subject to the same forces of supply & demand and fear & greed as any other. Currently it is playing out as a textbook short-sale target after failing on a breakout attempt three weeks ago. Technicals always rule, and investing on the basis of blind faith is a fool's game. That said, some metrics have proven sound in terms of guiding the position size of new entries once the technicals confirm a buy or short entry point. In other words, if you have sound metrics showing major bullish or bearish tendencies, you can use them as an aggregate to determine how much exposure you wish to have in bitcoin or other cryptocurrencies. In any event, there were recently three short-sale entry points along the way, labeled a), b), and c) on the chart. The breakout in early November was accompanied by much hype over new Bitcoin ETFs like BTF and BITO and the public-grandstanding by certain U.S. mayors about taking their salary in Bitcoin. Hopefully, they did not take their salary in Bitcoin at the peak, because they would now have effectively taken a 20% pay cut. It has been a pattern for Bitcoin and other crypto-currencies that highs generally occur when the hype reaches a crescendo and it appears that this recent peak was no different. $BTCUSD may now be set to test its 200-day moving average, but for now there are no optimal long or short entries pending further development of this chart.
As Bitcoin goes so go the crypto-related stocks. After a beautiful run from the original pocket pivots that we reported on back when Coinbase Global (COIN) was trading along its 50-day moving average in early October, the stock has now busted the 20-day exponential moving average, triggering a sell signal and short-sale entry at that point for alert short-sellers. It is now pushing down towards the 50-day moving average as it dangles in "mid-air."
With stocks reaching deep down in their patterns, we begin to see some potential undercut & rally (U&R) types of moves. How far these carry, however, is another story. On Friday, a name we've reported on previously, uranium producer Cameco (CCJ) gapped down and broke to lower lows but undercut the 23.41 low of October 27th by one cent before turning and rallying back up towards the 50-dma. If CCJ can clear the 50-day line then this move may have more legs to it, otherwise we would watch to see whether overhead resistance at the moving average comes into play and presents a lower-risk short-sale entry into CCJ's current reaction rally.
Thursday's mutant virus news provided the catalyst for the reversal of what was essentially an air pocket of leverage underneath the market, something we've discussed over the past week or so in our live webinars. Record margin interest and massive call option volume has been behind much of the speculative fervor and fever in this market as the major indexes post all-time highs over two weeks ago. Unsurprisingly, interest rates plummeted on expectations that a new virus variant would keep the Fed's current token tapering actions on hold. This market reaction comes despite rates near 0%, a 40-year high in the Consumer Price Index, and all-time highs in the Producer Price Index. That conclusion, however, did not seem to do much for stocks, which have relied on the never-ending flow of liquidity to put a floor under it every time a serious sell-off ensues, but expect that the stage is now set for some interesting volatility to take hold.