Background
So far this year we’ve seen a tremendous amount of volatility across literally all financial markets as a result of the tightening of monetary policy conditions by the largest and most influential central bank in the world – the Federal Reserve . The equity markets together with other risk assets like crypto have been in the cross-hairs ever since the Fed changed its overall stance and monetary policy plan back in early November, 2021. In the post FOMC meeting press conference on Nov. 3, 2021, the Federal Reserve Chair Jerome Powell indicated for the first time that the FOMC "will start to reduce the pace of asset purchases," in a process called tapering. Up until that point the Fed had been purchasing $80 billion in U.S. Treasury securities and $40 billion in U.S. agency securities each month. Powell stated that, starting in December 2021, these monthly asset purchases initially will be reduced by $10 billion for Treasury securities and $5 billion for agency securities. He then further emphasized that the central bank’s goal was to fully complete the tapering process by March, 2022, so that they could start raising interest rates after that.
Not surprisingly at all as a result of the hawkish stance of the Federal Reserve and the future of tighter monetary policy conditions ahead, investors started to abandon the previously loved high-growth tech stocks that were trading at extremely stretched valuations at that time. The so-called “multiple compression” process began at the end of last year and has continued to be the center theme in the market to this day. The concept is rather straightforward and we’ve written about it before – when monetary policy conditions tighten, credit becomes less available and more expensive, which makes it more difficult for these high-growth companies to continue to invest and grow at the same rate. This slows down their revenue and EPS growth numbers, and investors become less willing to pay that same premium as before for these stocks. As a result, a major repricing of this more speculative part of the market then begins and investors start looking and shifting their capital into more defensive, stable and dividend paying companies.
However, as we all know people tend to overcommit to various trends and narratives out there, which very often leads to the overextension of both bull and bear markets. Currently, investors are pricing 11 more interest rate hikes by the Federal reserve , which in our opinion is simply not realistic. We believe that as Economic data starts to deteriorate in the US with the ISM Manufacturing Index showing early signs of that already, the FED will make a dovish pivot signaling that the economy no longer needs 11 more rate hikes as it is not as strong as they had initially anticipated. This will inevitably lead to a major stock market rally which will be predominantly led by Technology stocks. The crypto market as a whole will also find its footing and make a move back up to its prior highs.
Why is that important you might ask?
Well, as much as crypto lovers, proponents and supporters have been trying to portrait Crypto and Bitcoin in particular as a completely separate, non-correlated, inflation-hedge asset class, this is simply not true. It is for sure an incredibly fast growing asset class, which undoubtedly will continue to play a major role in the way we communicate, transact and store value in the future. However, the reality is that the crypto market is still treated by institutional investors and money managers, which are indeed the people who move the markets, as a rather speculative risk-asset. This could be clearly identified by the strong intermarket positive correlation that we’ve seen between the crypto market and Bitcoin in particular and the Nasdaq 100 ( QQQ ) technology index. Bitcoin has pretty much mirrored the price action of the US tech sector ever since the Fed made that policy change back in November, 2021.
How can we use that to our advantage?
By identifying the presence of a strong positive correlation between Bitcoin and the QQQ index, we should treat that correlation as valid until proven otherwise. Monitoring the two markets simultaneously could allow us to spot potential trading opportunities forming on either one of the two charts and then wait for a confirmation of the trading set-up by the other chart. Taking our intermarket analysis one step further, we could analyze the volatility profile of not only the Nasdaq 100, but also of the S&P 500 and see where the markets could be headed next. As a general rule, when the volatility in equity markets rises, uncertainty rises and investors tend to become more fearful, which usually leads to major equity market declines, which can then translate into weakness in the price of Bitcoin as well.
The Volatility Index ( VIX ) is linked to the S&P 500 and is regularly referred to as the Fear and Greed index of the US equity markets. When the VIX stays at rather elevated levels for extended periods of time this represents the presence of a lot of Fear and Uncertainty among market participants. The technology sector accounts for nearly 30% of the S&P 500 and the Tech stocks are indeed the most volatile stocks out there, thus even though that the most popular volatility measure VIX is not directly linked to the technology index (NASDAQ, Nasdaq 100), it still represents a very accurate measure of the volatility profile of not only the broad market, but also of the QQQ as well. There is a specific volatility index that is linked directly to the NASDAQ 100, VOLQ , but it is less popular and not as relied on as the VIX benchmark.
Our findings
Our most recent research shows that since the beginning of 2022, there have been 3 occasions where the short-term low for the Bitcoin price coincided almost perfectly with the rejection of the VIX from its major multi-year downward sloping resistance line going all the way back to the March 23rd, COVID-19 sell-off. On all 3 occasions, this major rejection of the VIX from this key resistance line, happened right when the price of Bitcoin was laying around a critical support level . The combination of these intermarket signals produced a 30% rally in the price of Bitcoin in the following 2-4 week period in all three instances.
Here are the numbers:
Example 1 - January – February
Top for the VIX – Date: January 24th, 2022
Price of BTC /USD as of January 24th, 2022 = $35,000
Price of BTC /USD as of February 10th, 2022 = $45,000!
Example 2 – February – March 2022
Top for the VIX – Date: February 24th, 2022
Price of BTC /USD as of February 24th, 2022 = $37,000
Price of BTC /USD as of March 2nd, 2022 = $45,000!
Example 3 – March – April
Top for the VIX – Date: March 8th
Price of BTC /USD as of March 8th, 2022 = $37,500
Price of BTC /USD as of March 30th, 2022 = $47,500
The current picture
We saw two major daily rejections on of the VIX from the very same downward sloping trendline resistance that took place on May 2nd and May 10th respectively. This has coincided once again with the price of Bitcoin sitting at a critical support zone around the $30,000 level. In addition to that we’ve seen positive price action for BTC with higher highs and higher lows on the lower time frames, which is also an indication for the presence of bullish interest at these levels.
We believe that as we see the VIX retreating from these current elevated levels that a strong 30% move up could materialize in the next 2-4 weeks. Our price target for this up move will be the $38,000 level.
So far this year we’ve seen a tremendous amount of volatility across literally all financial markets as a result of the tightening of monetary policy conditions by the largest and most influential central bank in the world – the Federal Reserve . The equity markets together with other risk assets like crypto have been in the cross-hairs ever since the Fed changed its overall stance and monetary policy plan back in early November, 2021. In the post FOMC meeting press conference on Nov. 3, 2021, the Federal Reserve Chair Jerome Powell indicated for the first time that the FOMC "will start to reduce the pace of asset purchases," in a process called tapering. Up until that point the Fed had been purchasing $80 billion in U.S. Treasury securities and $40 billion in U.S. agency securities each month. Powell stated that, starting in December 2021, these monthly asset purchases initially will be reduced by $10 billion for Treasury securities and $5 billion for agency securities. He then further emphasized that the central bank’s goal was to fully complete the tapering process by March, 2022, so that they could start raising interest rates after that.
Not surprisingly at all as a result of the hawkish stance of the Federal Reserve and the future of tighter monetary policy conditions ahead, investors started to abandon the previously loved high-growth tech stocks that were trading at extremely stretched valuations at that time. The so-called “multiple compression” process began at the end of last year and has continued to be the center theme in the market to this day. The concept is rather straightforward and we’ve written about it before – when monetary policy conditions tighten, credit becomes less available and more expensive, which makes it more difficult for these high-growth companies to continue to invest and grow at the same rate. This slows down their revenue and EPS growth numbers, and investors become less willing to pay that same premium as before for these stocks. As a result, a major repricing of this more speculative part of the market then begins and investors start looking and shifting their capital into more defensive, stable and dividend paying companies.
However, as we all know people tend to overcommit to various trends and narratives out there, which very often leads to the overextension of both bull and bear markets. Currently, investors are pricing 11 more interest rate hikes by the Federal reserve , which in our opinion is simply not realistic. We believe that as Economic data starts to deteriorate in the US with the ISM Manufacturing Index showing early signs of that already, the FED will make a dovish pivot signaling that the economy no longer needs 11 more rate hikes as it is not as strong as they had initially anticipated. This will inevitably lead to a major stock market rally which will be predominantly led by Technology stocks. The crypto market as a whole will also find its footing and make a move back up to its prior highs.
Why is that important you might ask?
Well, as much as crypto lovers, proponents and supporters have been trying to portrait Crypto and Bitcoin in particular as a completely separate, non-correlated, inflation-hedge asset class, this is simply not true. It is for sure an incredibly fast growing asset class, which undoubtedly will continue to play a major role in the way we communicate, transact and store value in the future. However, the reality is that the crypto market is still treated by institutional investors and money managers, which are indeed the people who move the markets, as a rather speculative risk-asset. This could be clearly identified by the strong intermarket positive correlation that we’ve seen between the crypto market and Bitcoin in particular and the Nasdaq 100 ( QQQ ) technology index. Bitcoin has pretty much mirrored the price action of the US tech sector ever since the Fed made that policy change back in November, 2021.
How can we use that to our advantage?
By identifying the presence of a strong positive correlation between Bitcoin and the QQQ index, we should treat that correlation as valid until proven otherwise. Monitoring the two markets simultaneously could allow us to spot potential trading opportunities forming on either one of the two charts and then wait for a confirmation of the trading set-up by the other chart. Taking our intermarket analysis one step further, we could analyze the volatility profile of not only the Nasdaq 100, but also of the S&P 500 and see where the markets could be headed next. As a general rule, when the volatility in equity markets rises, uncertainty rises and investors tend to become more fearful, which usually leads to major equity market declines, which can then translate into weakness in the price of Bitcoin as well.
The Volatility Index ( VIX ) is linked to the S&P 500 and is regularly referred to as the Fear and Greed index of the US equity markets. When the VIX stays at rather elevated levels for extended periods of time this represents the presence of a lot of Fear and Uncertainty among market participants. The technology sector accounts for nearly 30% of the S&P 500 and the Tech stocks are indeed the most volatile stocks out there, thus even though that the most popular volatility measure VIX is not directly linked to the technology index (NASDAQ, Nasdaq 100), it still represents a very accurate measure of the volatility profile of not only the broad market, but also of the QQQ as well. There is a specific volatility index that is linked directly to the NASDAQ 100, VOLQ , but it is less popular and not as relied on as the VIX benchmark.
Our findings
Our most recent research shows that since the beginning of 2022, there have been 3 occasions where the short-term low for the Bitcoin price coincided almost perfectly with the rejection of the VIX from its major multi-year downward sloping resistance line going all the way back to the March 23rd, COVID-19 sell-off. On all 3 occasions, this major rejection of the VIX from this key resistance line, happened right when the price of Bitcoin was laying around a critical support level . The combination of these intermarket signals produced a 30% rally in the price of Bitcoin in the following 2-4 week period in all three instances.
Here are the numbers:
Example 1 - January – February
Top for the VIX – Date: January 24th, 2022
Price of BTC /USD as of January 24th, 2022 = $35,000
Price of BTC /USD as of February 10th, 2022 = $45,000!
Example 2 – February – March 2022
Top for the VIX – Date: February 24th, 2022
Price of BTC /USD as of February 24th, 2022 = $37,000
Price of BTC /USD as of March 2nd, 2022 = $45,000!
Example 3 – March – April
Top for the VIX – Date: March 8th
Price of BTC /USD as of March 8th, 2022 = $37,500
Price of BTC /USD as of March 30th, 2022 = $47,500
The current picture
We saw two major daily rejections on of the VIX from the very same downward sloping trendline resistance that took place on May 2nd and May 10th respectively. This has coincided once again with the price of Bitcoin sitting at a critical support zone around the $30,000 level. In addition to that we’ve seen positive price action for BTC with higher highs and higher lows on the lower time frames, which is also an indication for the presence of bullish interest at these levels.
We believe that as we see the VIX retreating from these current elevated levels that a strong 30% move up could materialize in the next 2-4 weeks. Our price target for this up move will be the $38,000 level.
