With the world markets in Turmoil, Bitcoin has managed to bounce around 70% from its lows and we now find ourselves at round $7k at the time of writing. It makes sense to have a review of the market to see how things are shaping up.
What we currently know is that Bitcoin is trading below all the key moving averages and the yearly pivot, we know that losing these caused the cascading effect to the downside and until they are regained I must remain bearish from a purely TA perspective. I will discuss the wider economic picture later on.
The above chart has most of the information needed to understand the importance of the current price point Bitcoin is at. There is a large volume node ending at $7k which also crosses a descending diagonal resistance which has only been broken once since July 2019. Should this be broken, Bitcoin will find itself with a potential run up to around $8k where there is a formidable level of resistance:
- Yearly pivot point
- 61.8% retracement of 2020 lows-Highs
- 200, 50 , 100 Day moving average
- 50/200 Daily pending death cross
- 20 Week Moving Average
- High Volume Node
Therefore any long side positioning at $7k is likely to run into possibly the worst cluster of resistance seen since the bear market of 2018 and caution must be taken to account for this should Bitcoin break $6.8-7k; the prize is 15% of upside but I’m expecting the hammer to fall so it’s worth bearing in mind that a return to $7k is likely to occur.
The best case I can see for bitcoin at the moment is pushing for $8k and then turning $7k resistance into support and then trading sideways for a few weeks.
The new bull-bear determining factors are the bullet points above, reclaiming these would be incredibly bullish and I would have to be fully invested at this point.
Should Bitcoin fail to take $7k, the good news is that the 200 week moving average, despite being lost briefly, was reclaimed and there was significant buying support, which is clearly visible in the volume and the OBV indicator below.
BTCUSD 3 Day chart
So as it stands, I am interested in re-buying retracements to the 200 WMA should they materialise or a break above the huge resistance cluster at $8k. I do have a small long position at the time of writing, on the basis that there has been continued strength in the order books building and backfilling on dumps, while there is seemingly more demand than supply around the 200 week moving average, this is but overall I’m interested in selling $8k and being long $5.8k.
Immediate Support / Resistance
Support at 200 Week moving average 5.5-6.2k - Resistance 6.8k 7.2k and huge resistance at $8k.
Bigger Macro Economic Picture.
Clearly the world is going through an almost unimaginable situation. Thinking back to the start of the year, it would have been obtuse to suggest that Bitcoin would swing from $7k to 10.4 and then down to the $3ks and the world would be on total lockdown by mid-March; this situation was somewhat unexpected.
The fall out is unprecedented Economic uncertainty. Major indices are down around 35%; the fed has “Unleased an unlimited Treasury Purchase Plan” - Unlimited; what could possibly go wrong.
In a nutshell, this meant two facilities on top of other fiscal stimulus
i) first facility to prop up large employers involving bridge financing for up to four years for investment-grade companies, in exchange for purchases of newly issued corporate debt by the Fed. Businesses could defer principal and interest payment to preserve cash for up to six months, but they would not be allowed to buy back shares or pay dividends if they tap the facility.
ii) A second programme would allow the Fed to purchase corporate debt in the secondary market.
These measures have been replicated by other central banks in one form or another but clearly the intention is to massively increase the cash flow for businesses in order to keep them alive while aggregated demand in the world economy falls off a cliff. Businesses are effectively borrowing the cash they need to survive during this time; the problem being how long the time is going to be.
The problem here is that there is an expectation that businesses will repay the debt out of future earnings and the fact is not an industry specific bail out. Clearly servicing the debt is going to be difficult having had top line income obliterated for an unknown time frame.
Overall, shareholders have suffered a loss of value in their investments and are indebted to the fed, but the fed has put a band aid on to keep things going for now, the detriment being the additional cash that will be in the system.
I don’t need to preach about how additional money supply will put an upward pressure on inflation and erosion of wealth for those holding fiat currency; but there is another issue that isn’t being discussed in much detail and that is the erosion of tax collections by the state; corporate tax is going to take a colossal hit so the Governments are also to be hit on their cash flow for a unknown period.
This means that not only is the money printer working overtime to provide “temporary” liquidity to businesses, but it is also going to have to do work to fill the gap on the government income side; the only possible outcome is a rapid increase in state budget deficits and debt (to the fed – important point). The reason I have temporary in inverted commas is that I don’t see how businesses are going to be able to return the funds in the timeframe mentioned due to the seismic effect on the already fragile system.
So realistically this is more likely the beginning of this problem than the end, the S&P500 and other markets have recovered somewhat, but the mind boggling thing is that the money printing is going to naturally artificially inflate the stock market to some extent simply due to the dollar devaluation, despite the companies ploughing into their distributable reserves by using the cashflow stimulus.
The S&P500 is now trading in a technical bear market with price below the 200 WMA and in impending Daily death cross.
SPX 3 Day chart
So regarding a recovery in the world markets in real-terms; its seems unlikely to say the least in the short term. The resulting additional indebtedness of the population will be repaid somehow; either through devaluation of the currency held or though corporate equity loss.
One of my favourite charts is the Money supply adjusted S&P500 chart; this has never been more relevant. The chart shows that in real terms we are about half of the way through a real SPX loss like 2008 in real terms. I can remember working in 2008 and there was no big world wide shut down and as far as we know the financial system is not in much better shape to simply absorb a situation like this.
SPX 3 M2 Adjusted Day chart
So what are the expected outcomes?
In my view, the additional cash flow bail out to the private sector, the reduced tax income and the unknown length of the issue underhand, while interest rates are already effectively zero spells out major risk of a continued economic downturn with very real risk of hyperinflation. Things are going to get very real in the states in the next few weeks as the parabolic impact of the COVID-19 virus takes over.
These are the very reasons Bitcoin was created. We know that Bitcoin is hard capped and that flight to safety assets will be the main benefactor in this situation;- eventually. There was a major decoupling in 2008 after a 50% draw down in real terms off the top of the S&P500 before gold decoupled and started moving higher while the S&P fell another 10% off the top. In equivocal terms, we are about 35% off the top in real terms, so it appears there is a real risk of further downside and if history is anything to go off, we may see additional impact on Gold and possibly Bitcoin as the reality of the situation occurs.
This is a complex topic and one that could be discussed indefinitely, but the key takeaway is that this is the very scenario that Bitcoin was created for. It is pleasing to see that mining revenue has recovered to more of a sustainable level which should help to protect the network as this was a concern of mine with the halving coming up, but overall the global situation at the moment should mean the price of Bitcoin can only really go one direction in the medium term; Money supply is increasing at an unprecedented rate, while Bitcoin’s inflation rate is halving. Assuming demand for sovereign hard assets is underlying and with there very much likely to be more on the way, it’s difficult to see how Bitcoin will not appreciate significantly in both nominal and real terms in the forthcoming years
Time will tell
Filb
- Extract from Newsletter in Signature.
What we currently know is that Bitcoin is trading below all the key moving averages and the yearly pivot, we know that losing these caused the cascading effect to the downside and until they are regained I must remain bearish from a purely TA perspective. I will discuss the wider economic picture later on.
The above chart has most of the information needed to understand the importance of the current price point Bitcoin is at. There is a large volume node ending at $7k which also crosses a descending diagonal resistance which has only been broken once since July 2019. Should this be broken, Bitcoin will find itself with a potential run up to around $8k where there is a formidable level of resistance:
- Yearly pivot point
- 61.8% retracement of 2020 lows-Highs
- 200, 50 , 100 Day moving average
- 50/200 Daily pending death cross
- 20 Week Moving Average
- High Volume Node
Therefore any long side positioning at $7k is likely to run into possibly the worst cluster of resistance seen since the bear market of 2018 and caution must be taken to account for this should Bitcoin break $6.8-7k; the prize is 15% of upside but I’m expecting the hammer to fall so it’s worth bearing in mind that a return to $7k is likely to occur.
The best case I can see for bitcoin at the moment is pushing for $8k and then turning $7k resistance into support and then trading sideways for a few weeks.
The new bull-bear determining factors are the bullet points above, reclaiming these would be incredibly bullish and I would have to be fully invested at this point.
Should Bitcoin fail to take $7k, the good news is that the 200 week moving average, despite being lost briefly, was reclaimed and there was significant buying support, which is clearly visible in the volume and the OBV indicator below.
BTCUSD 3 Day chart
So as it stands, I am interested in re-buying retracements to the 200 WMA should they materialise or a break above the huge resistance cluster at $8k. I do have a small long position at the time of writing, on the basis that there has been continued strength in the order books building and backfilling on dumps, while there is seemingly more demand than supply around the 200 week moving average, this is but overall I’m interested in selling $8k and being long $5.8k.
Immediate Support / Resistance
Support at 200 Week moving average 5.5-6.2k - Resistance 6.8k 7.2k and huge resistance at $8k.
Bigger Macro Economic Picture.
Clearly the world is going through an almost unimaginable situation. Thinking back to the start of the year, it would have been obtuse to suggest that Bitcoin would swing from $7k to 10.4 and then down to the $3ks and the world would be on total lockdown by mid-March; this situation was somewhat unexpected.
The fall out is unprecedented Economic uncertainty. Major indices are down around 35%; the fed has “Unleased an unlimited Treasury Purchase Plan” - Unlimited; what could possibly go wrong.
In a nutshell, this meant two facilities on top of other fiscal stimulus
i) first facility to prop up large employers involving bridge financing for up to four years for investment-grade companies, in exchange for purchases of newly issued corporate debt by the Fed. Businesses could defer principal and interest payment to preserve cash for up to six months, but they would not be allowed to buy back shares or pay dividends if they tap the facility.
ii) A second programme would allow the Fed to purchase corporate debt in the secondary market.
These measures have been replicated by other central banks in one form or another but clearly the intention is to massively increase the cash flow for businesses in order to keep them alive while aggregated demand in the world economy falls off a cliff. Businesses are effectively borrowing the cash they need to survive during this time; the problem being how long the time is going to be.
The problem here is that there is an expectation that businesses will repay the debt out of future earnings and the fact is not an industry specific bail out. Clearly servicing the debt is going to be difficult having had top line income obliterated for an unknown time frame.
Overall, shareholders have suffered a loss of value in their investments and are indebted to the fed, but the fed has put a band aid on to keep things going for now, the detriment being the additional cash that will be in the system.
I don’t need to preach about how additional money supply will put an upward pressure on inflation and erosion of wealth for those holding fiat currency; but there is another issue that isn’t being discussed in much detail and that is the erosion of tax collections by the state; corporate tax is going to take a colossal hit so the Governments are also to be hit on their cash flow for a unknown period.
This means that not only is the money printer working overtime to provide “temporary” liquidity to businesses, but it is also going to have to do work to fill the gap on the government income side; the only possible outcome is a rapid increase in state budget deficits and debt (to the fed – important point). The reason I have temporary in inverted commas is that I don’t see how businesses are going to be able to return the funds in the timeframe mentioned due to the seismic effect on the already fragile system.
So realistically this is more likely the beginning of this problem than the end, the S&P500 and other markets have recovered somewhat, but the mind boggling thing is that the money printing is going to naturally artificially inflate the stock market to some extent simply due to the dollar devaluation, despite the companies ploughing into their distributable reserves by using the cashflow stimulus.
The S&P500 is now trading in a technical bear market with price below the 200 WMA and in impending Daily death cross.
SPX 3 Day chart
So regarding a recovery in the world markets in real-terms; its seems unlikely to say the least in the short term. The resulting additional indebtedness of the population will be repaid somehow; either through devaluation of the currency held or though corporate equity loss.
One of my favourite charts is the Money supply adjusted S&P500 chart; this has never been more relevant. The chart shows that in real terms we are about half of the way through a real SPX loss like 2008 in real terms. I can remember working in 2008 and there was no big world wide shut down and as far as we know the financial system is not in much better shape to simply absorb a situation like this.
SPX 3 M2 Adjusted Day chart
So what are the expected outcomes?
In my view, the additional cash flow bail out to the private sector, the reduced tax income and the unknown length of the issue underhand, while interest rates are already effectively zero spells out major risk of a continued economic downturn with very real risk of hyperinflation. Things are going to get very real in the states in the next few weeks as the parabolic impact of the COVID-19 virus takes over.
These are the very reasons Bitcoin was created. We know that Bitcoin is hard capped and that flight to safety assets will be the main benefactor in this situation;- eventually. There was a major decoupling in 2008 after a 50% draw down in real terms off the top of the S&P500 before gold decoupled and started moving higher while the S&P fell another 10% off the top. In equivocal terms, we are about 35% off the top in real terms, so it appears there is a real risk of further downside and if history is anything to go off, we may see additional impact on Gold and possibly Bitcoin as the reality of the situation occurs.
This is a complex topic and one that could be discussed indefinitely, but the key takeaway is that this is the very scenario that Bitcoin was created for. It is pleasing to see that mining revenue has recovered to more of a sustainable level which should help to protect the network as this was a concern of mine with the halving coming up, but overall the global situation at the moment should mean the price of Bitcoin can only really go one direction in the medium term; Money supply is increasing at an unprecedented rate, while Bitcoin’s inflation rate is halving. Assuming demand for sovereign hard assets is underlying and with there very much likely to be more on the way, it’s difficult to see how Bitcoin will not appreciate significantly in both nominal and real terms in the forthcoming years
Time will tell
Filb
- Extract from Newsletter in Signature.
Comment:
Next phase incoming
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Follow on Twitter @filbfilb