Volkswagen VLKAY is a buy relative to GM Ratio Chart:
You can see how closely these two stocks trade (the blue line is GM) since Volkswagen (the bar chart) is a top selling auto company in Europe and GM is a top selling auto company in the US.
The ratio of the stock prices oscillates in a tight 15%-20% range over that past few years. Since the stocks have gone NOWHERE over the last year, you can see all of the profits (FROM HINDSIGHT) from establishing a trade where you are long one stock and short the other in the 1.23 area and exit at the 1.44 ratio area. There have been 6 movements of 15%+ on average, which, if compounded, would be a huge 100+ gain in your capital.
Ratio trading or pairs trading isn't without risk, but rather it is a very different way to make money that is stock market independent. In other words, you don't have to get the direction of the market correct, you just need to assess the strength of one stock relative to another one.
Right now, the ratio says to BUY VOLKSWAGEN and SELL SHORT GM.
1.23 last ratio
Tim 11:31AM EST Sep 3, 2015
Search in ideas for "RATIO CHART"
SLV - Ratio CartRatio chart of SLV /SPY. As you can see SLV is flirting with a breakout from a long standing trend line in a tight bull flag pattern. Volume is tracking with heavy moves up and light moves down. We have a rising 50 day ready to make a golden cross. I like SLV to break out and move quickly to the upside over the next few weeks and perhaps even months. Gold made its post pandemic high (its second stab over 2000) in March and typically silver makes its new high within a year. For this analysis the August 2020 pandemic high for gold can be considered an anomaly and not the high from which silver would typically make its new bull market high. Charts on silver miners have perked up. The dollar is still in need of additional correction and I see that lasting weeks as well. If you're long the market SLV looks like it may be a nice way to hedge against an equities downturn. Not trading advice just an observation. Good luck trading!
CNXMNC/NIFTYRatio chart suggests that CNX MNC to outperform NIFTY in coming times. One can find good trending stocks in MNC space for good risk reward
USOIL - this time may be differentRatio charts pointing to a possible bottom - uncertain as of now but looks promising for bulls.
Pvt banks vs PSU banksRatio chart comparison of the pvt bank index vis a vis the bank nifty and also the psu bank index vis a vis the bank nifty
CNX PSE breaking out relative to NiftyRatio chart of CNX PSE to Nifty - breaking out from a long downtrend
SPY/AGG Most Important Chart? (Part 2)Ratio chart of SPY to AGG (iShares Core U.S. Aggregate Bond ETF--the most widely held bond ETF)...i.e. SPY/AGG).
Shows bearish forming saucer (or rounding top) in SPY against AGG...i.e. that risk-on (SPY) looks to be putting in top against risk-off (AGG). Also has bearish RSI divergence.
See top in 2007 for similarities.
AGG/SPY Most Important Chart? (Part 1)Ratio chart of iShares Core U.S. Aggregate Bond ETF (AGG--the most widely held bond ETF) to SPY (i.e. AGG/SPY).
Shows bullish forming saucer (or rounding bottom) in AGG against SPY...i.e. that risk-off (AGG) looks to be putting in bottom against risk-on (SPY). Also has bullish RSI divergence.
See bottom in 2007 for similarities.
2014 crash?Ratio chart between the S&P 500 and US Treasury Bonds. The ratio is right now at the same height as before the crash in 2008 and it could eventually reach the levels of the pre-2000 crash if it continues.
The only times the monthly RSI(14) of this chart went over 70, a crash eventually followed. However notice the period from 1994 to 2000 where RSI hovered around 70 for a long time before there was a crash.
Take this chart with a grain of salt. The current fundamentals are much different then in the previous crises and a real crash is still unlikely. However, embracing for a good a legitimate correction in the stock market is reasonable.
Ratio chart warning for LUV long term investorsAlready overextended. Look olso at longer time ftame. GOOD LUCK
FXI: China Large Cap ETF Critical JunctureEven in retirement I scour hundreds of weekly and monthly charts. When I come across promising setups, I drill down to see if there are chart elements, price volume relationships, or other factors that might either preclude a trade or tip the odds heavily in favor of a particular outcome. Most of that process is covered in the "Potential TLT inflection and Notes on Process" post linked below.
FXI, is the China Large Cap ETF that holds the top 50 large cap stocks trading on the Hong Kong exchange. It is currently testing long term support. The outcome of the test is likely to set the stage directionally for the remainder of the year. While I came away from my analysis with a bearish view, this is also precisely the kind of setup around which I build mostly agnostic trading plans.
Fundamentally, there isn't much currently going on in China that leads me to optimism. China is a command economy run by a communist regime that is in the process of retreating from capitalism. Importantly, they seem to be increasingly resistant to stimulus. In the near term, the Zero Covid policy is still in effect and the property and construction sectors are in crisis. To that list you can add a rapidly aging population, a world increasingly resistant to buying from their goods, a rethinking of global supply lines and significant raw material and climate challenges. Granted, there are positives. They are becoming a chip superpower, and over the last two years have made some very significant technological advances. But, my in my view, the negatives outweigh the positives by quite a lot.
In early March, as price was punching through the range support, Vice Premier Liu He promised to keep equity markets stable, and that the crackdown on the tech sector would end soon. The promise created one of the strongest two-day rallies in years. Clearly, if China chooses to massively stimulate and overtly support their equity market (perhaps through direct purchase of equity) it would be a game changer. But, despite Liu He, I think pessimism is warranted. That said, as students of the market, we understand that narratives drive markets, until they don't, and then new narratives, evolve to explain the new price action.
Those of you familiar with my work know that I maintain a macro view on most markets. That view, informs my aggressiveness and risk tolerance, but, if a techncial setup provides a clear risk reward advantage, it does not deter me from making trades that don’t conform to the view. FXI is setting up exactly that situation.
Either it survives the test of the range lows, and sets up for potentially a 20-25% move higher, or fails and sets up what could be an even larger move lower. Either way, I will have a trading and risk management plan in place, no matter the directional outcome.
FXI Weekly: Since the March climax and automatic rally (AR) the market has traded laterally for 24 weeks and defined a trading range. Whether the range is one of re-distribution or of accumulation is an important, but difficult, question.
In this perspective the selling climax structure holds up, with a clear/classic high volume reversal bar. But, the follow through (AR) over the next two weeks was meager and volume still quite high. The combination of high volume and narrow price spread suggest that the market was already running into significant supply.
The Wyckoff selling climax sequence includes what he called the "automatic rally" (AR). The AR occurs as immediate sellers are cleared out by the selling climax. Some strong handed, proactive traders take new longs creating some nascent demand. I prefer to see the AR cover a significant distance. In my estimation, a weak AR represents a sign of weakness.
To become constructive, the market must, at a minimum, break above the A-B downtrend. That downtrend represents the stride of supply. It must also move convincingly above the lateral resistance along the 34.83 zone.
It is notable that FXI, has yet to complete a solid test of the low. I prefer tests well separated in terms of time that come close to fully retracing the climax structure. Failing this, a sign of strength above the high of the automatic rally (34.83) would suffice to suggest that a good bottom was in. If that level is exceeded, entering bull flags and other corrective style drift patterns would become part of my approach.
I have included a long-term volume profile on the chart. If the market does begin to work its way above the lateral resistance, the huge volume bulge in the 42.00 zone should act as strong resistance. 42.00 is also in the vicinity of the .50 - .618 retracement zones.
FXI Daily: In this perspective the selling climax appears very different. After gapping through the support, volume increased significantly and price spread narrowed somewhat (suggesting at least some developing demand). The Liu He statements gapped the market 10% higher and left behind an island reversal gap.
In this perspective it becomes clear that the exhaustive volume wasn't generated in a typical selling climax fashion, but rather after the gap and near the highs. In my view much of the volume was generated by strong handed sellers selling into the strength AFTER the market gapped higher. This is clearly an atypical selling climax and tempers any enthusiasm generated by the violent rebound evident on the weekly and monthly chart.
It is also notable that the lateral trade since the March low have relieved the oversold conditions that had accrued at the March low.
Relative Strength Ratio Chart: This is a weekly relative strength chart, comparing FIX (the numerator) to world markets URTH, (the denominator). It is somewhat skewed because URTH is not ex-China. In other words, China is included in both numerator and denominator, skewing the ratio. However, over the last decade, China has consistently underperformed. To become optimistic for anything beyond a trading turn would require the Chinese market begin to markedly strengthen relative to the rest of the world.
I often take a quick look at the larger components of any ETF I am thinking about trading. As I look through the top eight large cap names in the ETF I see few signs of a solid bottom or charts that appear ready to rally.
One last thought, in the process piece linked below my final step is the sanity check. Am I falling prey to behavioral bias? Am I being dispassionate? Is my belief system compromising my impartiality? I have to conclude that in the case of China, that it may well be so. I don't like the Chinese government and am loath to invest there for anything other beyond a trading turn. Historically, command economies that are becoming less free tend to make for lousy investments. They are also subject to step function changes due to changes in policy, wrecking risk management overlays. Clearly my strongly held view may compromise my read of the FXI chart. Because of this I will need pay greater than normal attention to how I build my trading plan.
Conclusion: I believe that the weight of the evidence suggests the presence of superior supply and supports the likelyhood that, once the oversold is removed, FXI falls through the bottom of its longer-term range. Clearly if the Chinese add stimulus or perhaps buy equity directly, the game/narrative could quickly turn and I will need to adjust. But as I build my trading plan I will be more much aggressive on the short side of the market.
And finally, many of the topics and techniques discussed in this post are part of the CMT Associations Chartered Market Technician’s curriculum.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Taylor Financial Communications
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
SPX Triangle Will Break Soon but Which Way?Which Way Will the SPX Triangle Break? Consider All the Arguments
Ever since the October 2022 lows, the S&P 500 SP:SPX has been consolidating especially when considered on larger time frames like daily and weekly. This consolidation has formed what is known as a triangle pattern (or symmetrical triangle). A triangle is a consolidation pattern that represents equilibrium in the balance between buyers and sellers. The range narrows and price action compresses until the consolidation ends. The Primary Chart above shows the current triangle that has formed. It is essentially a collision between a 3-month uptrend and a 13-month downtrend (lasting over a year since January 2022 highs). So long as price remains in this triangle, uncertainty about the intermediate term direction will likely remain. Many triangles have arisen this year, and each one has led to new lows. This one may as well, as the yield curves and macro data support this outcome. But price could whipsaw out the top of the triangle for a month or two before heading to lows. All possibilities remain on the table. For further discussion on the details of this triangle, please refer to the linked chart and post under Supplementary Chart A below.
Supplementary Chart A
1. Arguments for Bear-Market Continuation and Further Declines to New Lows
VIX has been trending lower to new lows. But this argument cuts both ways—it lies at multi-year support as well as the support zone for this entire bear market. It’s not a spot to be complacent. On the other hand, VIX could be forming a new seasonal range lower than the past few years. The downtrend in volatility must be respected until it breaks. But the break could be vicious and fast, occurring in a matter of hours / days. For now, VIX keeps failing right at the down TL from early October 2022 peaks.
Supplementary Chart B (VIX)
Consider the orange-colored down trendline from mid-October 2022 highs. Price continues to fail at that down TL. But price is also in the yellow rectangle, which is the major support / demand zone for volatility over the entire bear market to date. The pink uptrend line is a multi-year uptrend line where VIX has found support since 2017.
SPX shows a daily bearish divergence on RSI. But no weekly divergences yet. Stochastics and another indicator (EFI) both show clear divergences on the daily. But sometimes triple divergences form. And sometimes, these divergences are erased with higher price action. Divergence create the conditions for a decline, they don’t guarantee one. And without weekly divergences yet, this minor daily divergence is too weak a signal to take to the bank.
As of the December 2022 FOMC meeting, the Fed had not paused and it had not pivoted. In fact, the Fed remained hawkish, communicating a “higher for longer” message to markets. The FOMC’s published SEP (Summary of Economic Projections) showed that rates were forecasted to peak at 5.1% (on average) which was higher than its prior rate forecast of 4.6%. The Fed’s projections also showed that it expected no rate cuts throughout 2023. In other words, higher for longer, even if rate hikes were paused.
Will the Fed’s messaging and policy from December 13, 2022, remain steadfast? If so, the markets will likely struggle to find a way higher unless they continue to completely disbelieve the Fed. Note that rate markets (and equity prices) are currently disagreeing with the Fed about rate cuts later this year. That all could change on February 1, 2023.
Money supply has continued to shrink. Tom McClellan said to financial media recently that M2SL has been shrinking while GDP has been growing, and this has never happened—the ratio of M2/GDP has never been shrinking this fast. Note that there is a lag b/w M2 changes and the effects on markets. But M2 has been shrinking for a while now. Note that when M2 rises faster than GDP, this can fuel rallies a year later, but this is the opposite of that scenario.
However, note that US Treasury Department maneuvering relating to the debt-ceiling crisis could hamper the Fed’s efforts to drain liquidity from markets. Other than its general effect on markets, this maneuvering is well beyond the scope of this article and the author’s knowledge.
Consumer spending and corporate profits cannot hold up much longer given the leading economic indicators (PMIs, ISMs, Empire State Manufacturing Index, retail sales reports from December, mortgage applications, and housing data). But equity markets don’t seem convinced. Markets can remain irrational longer than traders can remain solvent.
Gold on a ratio chart to SPX (GLD/SPX) is still outperforming. This is not an all-clear signal for equities, especially the blue-chip index of US stocks.
Supplementary Chart B (GLD/SPX)
Typically, a bear-market bottom / final low does not happen while yield curves remain inverted. One WS analyst stated unequivocally yesterday that 85% of the yield curves are currently inverted. According to that firm's indicators, if more than 55% of the yield curves are inverted, a recession always follows. But when? The timing is the tricky part especially for traders and investors. Bear markets can fool the vast majority.
The 3m/10y curve has been inverted to levels not seen since 1981. The inversion has fallen deeper into negative territory than any other inversion on the data available on TradingView’s charts. The final bear-market low typically happens after the Fed has pivoted and cut rates for some time. And remember, when the Fed cuts, it’s not because the economic outlook and corporate earnings are bright. Rather, the Fed cuts because of deteriorated economic conditions, tanking earnings and earnings estimates, horrible employment numbers (a recession).
Supplementary Chart C.1 (3m/10y)
For further discussion on the 10y/3m yield curve, see the post linked here:
Supplementary Chart C.2
Recent PMI data from SP Global was negative economically (US Manufacturing PMI at 46.7 while December was 46.2, and US Services PMI at 46.6 while December was at 44.7) though it moderated somewhat (slightly less negative) from the prior month’s data.
“The US economy started 2023 on a disappointingly soft note with business activity contracting sharply again in January. It showed subdued customer demand and impact of high inflation on client spending. January data also indicated a “faster increase in cost burdens at private sector firms. Although well below the average rise seen over the prior two years, the rate of cost inflation quickened from December and was historically elevated.”
The commentary by SP Global’s economist provided along with their recent PMI report noted that “not only has the survey indicated a downturn in economic activity at the start of the year, but the rate of input cost inflation as accelerated into the new year, linked in part to upward wage pressures, which could encourage a further aggressive tightening of Fed policy despite rising recession risks.” This suggests that even if inflation has peaked, it may not be heading to the 2% target as fast as it moved down from the peak to the current levels. And it implies that stagflation may be around the corner as economic growth slows but sticky inflation does not dissipate.
Major past selloffs in markets have been preceded by a very low unemployment (UE) rate. The rate has been as low as 3.5% recently. One analyst, Eric Johnston at Cantor Fitzgerald, noted that investors would do well by buying markets when the UE rate is 9% to 10%, and selling the market when it reaches extreme lows from 3% to 4%. UE rates haven’t begun to significantly roll over, and the Fed has remained focused on the tight labor markets and services sectors as sources of more sticky inflation. So if PMIs from January are showing wage pressures increasing somewhat, that doesn’t suggest the Fed will be *cutting* rates soon, though a pause may be discussed as rates approach 5%.
Taxes as a percentage of GDP are at the level that coincides with recessions. Taxes are 18% of GDP.
2. Arguments for a Rally That Precedes New Bear Market Lows
First, a rally that breaks the down trendline does not immediately negate the bear market. The 2000-2002 bear market experienced a substantial multi-month break of its down trendline (complete with a successful backtest after the break) before the next major leg down to new lows occured.
Supplementary Chart D (2000-2002 Example)
SPX continues to stabilize above major support / resistance zones such as 3900 and 3950. And it has closed above 4000 three consecutive days this week: January 23, 24, and 25. When it meets the down TL, it has not been reacting lower the way it has on every other test of the trendline during this bear market. It’s spending quality time with the TL, which is a new phenomenon / characteristic when price and the TL meet.
SPX continues to hold above major anchored VWAPs from August, October, and December 2022, which range from 3850 to 3900.
AAPL's price action is fairly bullish in the short-to-intermediate term. Here are the bullish technicals arising on AAPL's chart.
AAPL’s daily chart shows a failed breakdown beneath major support levels over the past year. AAPL broke below $134.37 and $129.04 and fell to a new low, but quickly reclaimed $129.04 and $134.37, so this constitutes a failed breakdown. The failed breakdown is visible on the daily chart, so this is supportive of prices for several weeks to a couple months. $134.37 was the level coinciding with the lows from October 13 and November 4, 2022. $129.04 was the June 2022 low, which was undercut in December 2022 and early January 2023. Price broke below all these levels and then immediately reclaimed them.
AAPL’s failed breakdown coincided with a tag of the parallel downtrend channel from the all-time high.
AAPL shows positive (bullish) divergences with momentum indicators on both the daily and weekly charts.
AAPL remains right at or slightly above the down TL from the mid-August 2022 highs, which was a fairly steep 5-month downtrend.
AAPL remains above a short-term TL from June lows, but it also remains contained in its downtrend channel from the all-time high. AAPL is in no-man’s land, with some bullish forces that brought it here (divergences and failed breakdowns)
Supplementary Chart E.1 (AAPL's Failed Breakdown)
Supplementary Chart E.2 (AAPL's Parallel Channel Support)
NDX (Nasdaq 100) broke above its down TL (linear chart only) and has held above it as well. It also has been making higher lows since the October 2022 lows.
Supplementary Chart F.1 (NDX QQQ Log TL)
Supplementary Chart F.2 (NDX QQQ Linear TL)
IWM broke above its down TL on both log and linear charts. But it remains at critical resistance at the $188-$192 zone. It remains above intermediate term VWAPs from swing highs and lows in August, October and December 2022 (which are around $180), but it still remains below the VWAP anchored to its all-time high.
Supplementary Chart G (IWM Linear TL)
HYG broke above its down TL. Like other TL breaks, this could ultimately be a false signal, but here it has persisted for some time. HYG had a breakout above its down TL in the 2007-2009 bear market driven by the great financial crisis. This breakout was a false signal b/c the bear market was not over until early 2009, when the SPX made new lows. HYG resumed a downtrend after breaking above its down TL and went back to lows again and made lower lows, a move that coincided with SPX heading to new lows in Q1 2009. HYG shows a small bearish divergence on RSI on the daily chart. Wait for a larger bearish divergence to form on both daily and weekly charts perhaps.
VIX has been trending lower to new lows. But this argument cuts both ways—it lies at multi-year support as well as the support zone for this entire bear market. It’s not a spot to be complacent. On the other hand, VIX could be forming a new seasonal range lower than the past few years. The downtrend must be respected until it breaks. VIX keeps failing right at the down TL from early October 2022 peaks.
Consumer spending and corporate profits cannot hold up much longer given the leading economic indicators (PMIs, ISMs, Empire State Manufacturing Index, retail sales reports from December, mortgage applications, and housing data). But equity markets don’t seem convinced. Markets can remain irrational longer than traders can remain solvent.
Earnings at major publicly traded companies may not be deteriorating quickly enough to disprove the “soft-landing” narrative that pervades markets. Recession does not mean stocks go straight to lows when yield curves have inverted. Recessions take time to unfold, just as the damage to economies takes time when rates are restrictive. There is a lag.
Both FTSE and DAX have taken out the highs from mid-December 2022. FTSE is approaching multi-year highs. Both have broken above down TLs from the bear market. Both have decisively reclaimed 200-day SMAs. Both have been forming higher highs and lows
Multi-week bear-traps occur frequently where significant down trendlines are broken until the bear market resumes in earnings in a period of several weeks or months. The 2000-2002 bear market provides an excellent example of this. So a break to the upside in the triangle pattern on SPX may last for several weeks or even months before the real downside move begins. Just because it’s been challenging and choppy does not mean it won’t get worse and more trappy.
The third year of a presidential term (US markets) is nearly always bullish. There have been exceptions according to Tom McClellan (technical expert citing 1939 as an exception to this rule but noting that Hitler’s army was marching across Poland at the time). Some have said that the most bullish quarter of the presidential cycle is Q1 of the third year (technical expert Mark Newton speaking to financial media on January 24, 2022).
Breadth has been strong lately, and some technical analysts have cited “breadth-thrust” indicators as giving bullish signals.
Markets continue to disbelieve the Federal Reserve. Consider the differential b/w the Fed’s forecasts and the rate markets forecasts about whether rate cuts will happen this year, and where the terminal rate will be. So even if the Fed remains hawkish at the next meetings, perhaps it won’t matter. Markets will do what they want to do, including "fighting the Fed." You don't have to fight the Fed though or any other central bank. But don't fight the trend either.
The Fed’s messaging at the February 1, 2023 FOMC presser may be slightly more dovish, or it may be interpreted as dovish if Powell so much as mentions a pause in hikes, or that the FOMC is discussing a pause. Even if Powell remains hawkish, sometimes markets can interpret the Fed Chair’s statements (sometimes ambiguous) the wrong way—recall that this happened at the July FOMC in 2022, after which Powell cleared up the confusion at Jackson Hole in August 2022 (tanking markets immediately).
Equity positioning remains fairly underweight US equities according to financial experts on this subject. This could lead to momentum chase higher to trap all the bears before the real decline gets underway. Maybe stocks continue higher until two things occur: EPS estimates fall further, employment numbers start getting quite ugly, and the Fed is not as accomodative as it has been in past economic recessions (because while inflation has peaked, it may not fall directly to the 2% target, and with easing financial conditions, perhaps inflation could stop falling rise in Q1 2023)
Equal-weighted S&P 500 (RSP) has broken above its down TL on a daily close as of January 25, 2023.
The offense-defense ratio (consumer discretionary divided by consumer stables) RCD/RHS shows a breakout in this ratio above 8-month highs in the ratio’s value. This potentially signals near-term strength in equity markets as offensive stocks (consumer discretionary) outperform stocks defensive names (consumer staples)
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Author's Comment: Thank you for reviewing this post and considering its charts and analysis. The author welcomes comments, discussion and debate (respectfully presented) in the comment section. Shared charts are especially helpful to support any opposing or alternative view. This article is intended to present an unbiased, technical view of the security or tradable risk asset discussed.
Please note further that this technical-analysis viewpoint is short-term in nature. This is not a trade recommendation but a technical-analysis overview and commentary with levels to watch for the near term. This technical-analysis viewpoint could change at a moment's notice should price move beyond a level of invalidation. Further, proper risk-management techniques are vital to trading success. And countertrend or mean-reversion trading, e.g., trading a rally in a bear market, is lower probability and is tricky and challenging even for the most experienced traders.
DISCLAIMER: This post contains commentary published solely for educational and informational purposes. This post's content (and any content available through links in this post) and its views do not constitute financial advice or an investment or trading recommendation, and they do not account for readers' personal financial circumstances, or their investing or trading objectives, time frame, and risk tolerance. Readers should perform their own due diligence, and consult a qualified financial adviser or other investment / financial professional before entering any trade, investment or other transaction.
SPY Analysis (December)This is an analysis of the S&P 500 for December 2022. Right now, the market is producing some unusual charts.
Volatility
Volatility is one such unusual chart.
As most traders know, the VIX is a volatility index derived from S&P 500 options for the 30 days following the measurement date. Volatility measures the frequency and magnitude of price movements over time.
On Black Friday, the VIX closed the week at the lowest RSI in nearly 10 years.
The chart above shows the weekly RSI for the VIX closing at 40.86 on Friday, November 25th -- the lowest weekly closing RSI value since early 2013.
What's even more unusual is that this occurred only one trading day after the VIX closed with the lowest daily RSI value in nearly 18 years.
The chart above shows that the daily RSI for the VIX reached the lowest value in nearly 18 years on Wednesday, November 23rd.
While these unusually low oscillator levels for the VIX are not necessarily predictive of future price action it is interesting that the VIX, which is often portrayed as the fear index, is extended so low and yet price action remains so weak. One would think that with fear theoretically evaporating, as evidenced by a falling VIX, price would be rebounding more forcefully.
There still has not yet been complete VIX term structure backwardation. VIX term structure backwardation occurs when the market prices in decreasing volatility in the future. The VIX term structure usually goes into complete backwardation near economic cycle bottoms, as this structure reflects the type of capitulation that major stock market bottoms typically exhibit.
The chart above shows the VIX term structure. Currently the market is pricing in higher volatility in 2023.
This chart may suggest that a major market bottom has not yet occurred since the market continues to price in higher volatility in the future.
Regression Channel
Regression simply refers to the idea that price tends to revert (or regress) to its mean for a given timeframe. Regression channels can help us extrapolate the strength of the current trend. These channels can also give us insight into trend reversals.
Since the start of 2022, the daily regression channel has been down sloping.
The chart above shows a regression channel applied to the daily chart of the S&P 500 (SPX). The red line is the mean or average price. The lower blue line is 2 standard deviations below the mean and the upper blue line is 2 standard deviations above the mean. To use this indicator search for the script "Linear Regression (Log Scale)" by Forza.
The S&P 500 recently reached the upper channel line, or 2 standard deviations above the mean.
The chart above provides a closer look at the regression channel. The indicator on the bottom is the Stochastic RSI indicator which gives us an idea of how overextended price is currently trading.
Price appears to have been resisted by the upper channel line. At the same time, the Stochastic RSI oscillator appears to show that price is becoming overextended to the upside. This could mean that price may retreat downward on the daily chart.
Ichimoku Cloud
The 2-day chart of SPX below shows that since the start of the bear market no candle has been able to close above the Ichimoku Cloud.
The chart above uses the Ichimoku Cloud indicator. This is one of the best indicators for detecting trend reversals. When a candle breaks above the cloud from below, it is often considered a bullish trend reversal on the timeframe analyzed. Similarly, when a candle breaks below the cloud from above, it is often considered a bearish trend reversal on the timeframe analyzed. The shaded area that constitutes the cloud acts as support when price enters from above and resistance when price enters from below. A candle close above or below the cloud on strong volume is considered "piercing" the cloud.
We can also see that price is currently at a narrow portion of the cloud. This could provide an opportunity for SPX to pierce through the cloud on the 2-day timeframe.
Weekly Chart
In the weekly chart below, we can see that the EMA ribbon remains completely inverted. The EMA ribbon is a collection of exponential moving averages that act as resistance when price reaches it from below and support when price reaches it from above.
The last time the EMA ribbon completely inverted like this was during the Great Recession.
As shown below, the weekly chart of the Nasdaq 100 ETF (QQQ) looks even weaker than SPX.
The EMA ribbon has not only completely inverted, but it has widened, making it more difficult for price to pierce the ribbon to the upside. In general, price has a more difficult time piercing the EMA ribbon when it is wide than when it is narrow. This is often why price consolidates before it breaks out. Consolidation tightens the EMA ribbon.
Although anything can happen, it remains very possible that QQQ can capitulate all the way down to its pre-pandemic high as shown below.
This could mean that as a ratio to the money supply, the Nasdaq 100 goes all the way back to its March 2020 bottom, thereby wiping out all the wealth that investing in tech stocks created since the pandemic began.
To see why the money supply can be used in this way, you can check out my post here:
Higher Timeframes
When analyzed on the higher timeframes, the S&P 500's current price action looks analogous to the Early 2000s Recession, as shown below.
Following the Early 2000s recession, it took over 12 years for the stock market to sustain new all-time highs. Although anything is possible, unfortunately, the current situation is looking similar.
Additional Charts
Below is an assortment of interesting anecdotal charts that give insight into the current market.
The chart below shows the total securities sold by the Federal Reserve in the temporary open market (overnight reverse repurchase agreements). The chart shows a break has occurred below the trendline that has been in place much of the year. This could mean that the Federal Reserve has pivoted behind the scenes.
The below chart is merely the inverted version of the previous chart. It shows that the Fed has recently been providing increasing amounts of cash to the U.S. banking system.
Yet, the Fed is still hiking interest rates.
The Fed also continues to roll assets off its balance sheet.
So why might the Fed be continuing to hike rates and roll assets off its balance sheet, while also adding cash to the banking system? These actions seem to counter the effect of each other.
In effect, now that inflation appears to be cooling down somewhat, the Federal Reserve is ensuring that there are no liquidity issues within the banking system. While this is good for the banking system, it’s not immediately helpful outside of the banking system. Thus, while U.S. banks are faring quite well right now, liquidity crises are growing in the speculative fringes of the market, especially in the cryptocurrency space. The liquidity crisis is likely to get worse before it gets better because the Fed continues to hike rates, which has a lagging effect on liquidity.
The above chart shows that in the past 12 months over 70% of the capital in cryptocurrency has evaporated. The Fed’s tightening strategy has led to the worst monetary conditions for cryptocurrency in its short history. The liquidity crisis in the cryptocurrency space is likely the tip of iceberg of what’s to come as central banks around the world end their decades-long monetary easing experiment.
Even though the central bank is looking to slow down its most drastic hiking cycle ever, there’s little sign that commodity prices are cooling down sufficiently enough to allow for a pivot to easier monetary conditions.
In chart above, we see that the weekly EMA ribbon is still holding as support for commodity prices. This suggests that the bull market for commodities continues. Over the past year, commodities have increased in price despite tighter monetary conditions. This must mean that the scarcity of commodities, and/or the demand for them, must be greater than the scarcity and/or demand for U.S. dollars. As shown below, the monthly Stochastic RSI has fully oscillated down and is ready to begin pushing momentum back to the upside for commodities.
One might wonder whether commodity prices are forming a bull pennant structure. Imagine how bad it will be if the Fed stops hiking rates and commodity prices continue to inflate. What would happen if the unemployment rate rose to 6%-8% while the inflation rate remained around 6%-8%? This stagflationary outcome is actually quite possible.
The Fed’s tightening has already led to the most extreme decline in the money supply on record. This could have major consequences for corporate earnings because corporations can only earn some subset of a rapidly shrinking supply of money.
The decline in the U.S. money supply is likely to cause major liquidity issues that will reverberate from the speculative fringes of the market inward to all segments of the economy forcing the Fed to intervene to put out fires. Already, we've seen drops in the price of growth and IPO stocks that are so substantial that they are rarely seen outside of the context of recessions and financial crises.
The chart above shows how drastic the price collapse has been for the Renaissance IPO ETF. Recent IPOs depend heavily on borrowing. The cost of borrowing has skyrocketed in 2022, jeopardizing the existence of many companies that completely rely on continued borrowing.
Since the U.S. dollar is the world's main reserve currency, and therefore the most demanded currency, these liquidity issues could be amplified outside of the United States, especially in countries where central banks maintain a much looser monetary policy than the Federal Reserve. Although the Fed is effectively exporting inflation to other economies by hiking interest rates more than the central banks of those economies, the Fed's rate hikes are obviously not without harm to the U.S. economy. Among other things, these hikes will cause unemployment in the U.S. to rise.
Initial unemployment claims have been moving in lockstep with the inverted chart of the assets on the Fed’s balance sheet.
If we apply a smoothened 20-week moving average, the charts look virtually the same.
The reason for the connection between assets on the Fed’s balance sheet and the unemployment rate is simply that these assets influence the money supply. By letting assets roll off, the Fed is engineering tighter monetary conditions which in turn causes a scarcity of money. When money becomes scarcer, companies look to cut costs and the main way to cut costs is to freeze hiring, cut pay increases, cut employee benefits, and ultimately, lay off employees. Hence, the inverted chart of the Fed’s balance sheet can be considered somewhat of a leading indicator for the unemployment rate.
Recently, the yields on the 10-year U.S. treasury bond peaked right at the top of the EMA ribbon on the yearly chart. However, the momentum on the yearly chart is upward, suggesting yet even higher yields in the years to come.
The below chart shows that the 30-year treasury yield has inverted relative to the 3-month treasury yield.
This type of yield curve inversion usually occurs in the quarter(s) leading up to a recession. An inverted yield curve reflects the destruction of credit and the money supply. When the yield curve is inverted, banks can no longer profitably borrow at short term rates and lend at long term rates. Bank lending creates the most amount of money. Since the stock market generally tracks the money supply, as the money supply declines, generally so too does the stock market.
The below chart is very interesting. It provides evidence that the 40-year monetary easing experiment may have ended.
The chart shows the U.S. money supply as a ratio to the yields on 10-year US treasury bonds. By creating such a ratio, we elucidate the Fed's the monetary interventions over the past 40 years. As the Fed cut rates, the money supply rose proportionally resulting in this ratio chart moving horizontally.
Beginning in the 1980s the Federal Reserve began to steadily cut rates on government bonds over time as a means to increase the money supply. Then in the 2000s, in order to cut the rates on bonds even more the Federal Reserve began to buy large amounts of bonds. This allowed the central bank to force the yields on bonds artificially below what the market would normally demand. By 2020, this monetary action became so extreme that both real and, in some cases, nominal yields reached negative territory. In a normal set of circumstances, negative yields on bonds would never occur as it essentially reflects a guaranteed loss of money for the investor. Monetary easing, therefore, created a perversion whereby the yields on government bonds no longer accurately reflected the market’s belief in the credit worthiness of the government. The main reason why governments were able to get away with this market perversion was because commodity prices were being forced lower and lower by increasing globalization, increasing productivity/efficiency, and efforts by China to artificially drive down commodity prices to force out competition and gain control of supply chains. So long as commodity prices were falling, extremely loose monetary conditions did not result in high inflation.
Since the money supply moved horizontally relative to the yields on bonds over this period, we can extrapolate that the decline of these yields is how the central bank was able to increase the money supply. To increase the money supply exponentially without a corresponding decline in interest rates, the central bank would have needed the GDP to grow at a corresponding exponential rate. While exponential GDP growth was feasible in the past, today GDP growth continues to slow globally as populations and resource extraction reach their carrying capacity. Therefore, the problem that central banks currently face is largely insurmountable. Central banks can no longer increase their money supply exponentially while GDP growth is slowing, and while interest rates cannot be cut further without causing high inflation. Central banks are trapped because they have run out of tools to artificially prop up the value of risk assets. They are now forced to let the air out of the biggest asset bubble in history. Fortunately, so far, the deflation in asset prices has not been particularly chaotic, but that could change as unemployment rises and geopolitical tensions mount.
Nonetheless, it is during market turmoil that continuing to accumulate diversified, no-fee or low-fee investments in tax-sheltered retirement accounts can prove most lucrative in the long term. History has shown that staying invested in the stock market is the best means of wealth preservation over the long term.
Please leave a comment if you find an error in my analysis above or if you'd otherwise like to share your thoughts. Thank you.
Gold vs. Silver: Is the Ratio Signaling a Major ShiftIntroduction:
Precious metals are displaying promising price action, warranting a closer look at the gold AMEX:GLD to silver AMEX:SLV ratio. This ratio provides valuable insights during bull markets:
Bullish Silver: In a strong bull market, silver typically outperforms gold, causing the ratio to decline.
Gold Leading: Recently, gold has taken the lead, advancing in a corrective rally, but there are signs this could change.
Analysis:
Inverted Saucer Formation: On the gold-to-silver ratio chart, a large inverted saucer formation is emerging. This bearish pattern indicates a potential breakdown below key support levels, signaling silver’s outperformance in the months ahead.
What to Watch:
A confirmed breakdown of support in this ratio could signal a major shift in favor of silver.
If silver outperforms, prices could surge to retest its 2011 highs of $48-$50 next year.
Gold Outlook: Despite the shift in favor of silver, gold remains bullish. A breakout could target significant upside, with price projections of $3,300-$3,400.
Trade Setup:
Silver Bullish Setup:
Trigger: A breakdown in the gold-to-silver ratio, confirming silver’s relative strength.
Target: SLV retesting $48-$50.
Stop Loss: Manage risk by placing stops near recent support levels in silver.
Gold Bullish Setup:
Gold continues to show strength, targeting $3,300-$3,400. Monitor for breakouts in gold prices alongside silver’s potential surge.
Conclusion:
The precious metals setup looks increasingly bullish. The gold-to-silver ratio is hinting at a shift toward silver outperformance, a hallmark of true bull markets. If this scenario plays out, silver could retest its 2011 highs, while gold targets new all-time highs. This is a chart and setup worth keeping a close eye on in the coming months. Which metal do you think will lead the charge? Share your thoughts below!
Charts:
(Include charts showing the gold-to-silver ratio with the inverted saucer formation, key support levels, and projected breakdown targets. Add gold and silver price charts highlighting bullish setups.)
Tags: #Gold #Silver #PreciousMetals #GLD #SLV #BullMarket #TechnicalAnalysis #TradingIdeas
The Bitcoin CorridorWhat if there were two straight lines between which all of Bitcoin's price action could be contained?
If such lines exist, they could provide tremendous insight into the future price of Bitcoin.
As it turns out, the Bitcoin power law corridor theory hypothesizes that such lines may exist. However, in order to see these lines within a price chart, one must dramatically change one's frame of reference. In this post, I will attempt to change your frame of reference and transform the chart of Bitcoin so that its entire price history is contained between two straight lines.
First, here's a chart that shows the entire price history of INDEX:BTCUSD
Next, I will log scale the chart. Many users on TradingView know how to log scale their charts, but if you do not, here's a post on how to do it .
As shown in the chart below, after I log-scaled the chart, I then adjusted the y-axis such that each value on display is a power of 10.
Now, here's the part where you have to change your frame of reference.
Up until now, you have only seen charts on TradingView with a linear x-axis (time). However, in some cases, it is appropriate to plot time using a logarithmic scale. This is because a logarithmic scale compresses the time dimension, making it easier to see trends over very long periods of time.
Therefore, one can log-scale the time axis of one's charts to observe the movement of Bitcoin's price over long periods of time. When this is done, Bitcoin's price appears to be contained between two straight lines. Bitcoin is bound by these two lines as it oscillates with each halving cycle. As the effects of each halving cycle diminish over time, Bitcoin's price converges towards a singularity.
Why does Bitcoin's price action behave in this manner? The answer is that Bitcoin's price is an oscillatory logistic growth function . Logistic growth functions approach some finite horizontal asymptote over time. However, when both the horizontal (x-axis) and vertical (y-axis) are logarithmically scaled, the logistic function transforms into a straight line. To read more about the significance of Bitcoin as a logistic growth function, including how it informs my cryptocurrency investment strategy, you can check out my post below.
There are some criticisms of the power law corridor theory, including that Bitcoin's price data does not sufficiently meet certain assumptions about regression that must be true in order for the theory to also be true. These criticisms are outlined in this article . Additionally, the theory breaks down in the event that the U.S. dollar enters into hyperinflation. In this event, the price of Bitcoin will begin to move up hyperbolically rather than linearly, even on a logarithmic scale. Some argue that rather than moving within a power law corridor, Bitcoin's price moves according to a hyperbolic growth model. ( Watch an animation of this model here ). Nonetheless, the power law corridor theory is quite insightful for Bitcoin's current price action.
The chart above shows the extreme magnitude of hyperinflation in Germany's Weimar Republic. For Bitcoin to reach its predicted value under the hyperbolic growth model, the U.S. dollar would need to experience a similar magnitude of hyperinflation during its end stage.
The final thought I want to share may be a bit confusing, but I encourage you to think outside of your usual frame of reference. Here's a question to get you started: Have you ever noticed that when Bitcoin is plotted as a ratio to any other asset, the chart looks exactly like the price of Bitcoin?
The chart above shows (1) the price action of Bitcoin on the left relative to the U.S. dollar, and (2) shows the price action of Bitcoin relative to the price action of the S&P 500 on the right. Despite being used as a ratio to the S&P 500 in one chart but not the other, both charts still look virtually identical.
With the exception of several other cryptocurrencies, no matter what asset you choose, plotting the entire price history of Bitcoin as a ratio to the asset reveals a logistic growth function. This finding is actually quite significant. It implies that Bitcoin is uniquely suited to become the new standard for measuring value. As an asset with increasingly constant scarcity, Bitcoin is able to achieve what no other financial instrument in history has ever been able to achieve: a constant unit by which the value of all other assets can be measured.
You may not realize it, but virtually all of the charts on TradingView are ratio charts. In most cases, the unit of value measurement is the U.S. dollar. However, since the value of the U.S. dollar changes over time, dependent on the supply of dollars set by the Federal Reserve, the dollar's ability to be a constant unit for measuring the value of other assets is thus significantly limited.
The chart above shows the quarterly rate of change of the 2-year Treasury yield. This yield represents the risk-free rate over a two-year period, which reflects the cost of a U.S. dollar over that period. The volatility of the yield in recent quarters highlights the fact that the value of a U.S. dollar has become unstable. This instability underscores the problem inherent in using the U.S. dollar (or any fiat currency) as a measure of value for other assets.
If Bitcoin indeed becomes an asset by which the value of all other assets is compared, then Bitcoin's volatility will go to zero because its value will be measured relative to itself. Bitcoin is only volatile right now because its value is being measured in U.S. dollars. Since the value of the U.S. dollar can change widely over time as the central bank expands and contracts the money supply, this volatility in Bitcoin's price, in large part, actually reflects the volatility in the value of dollars.
In most cases, when an asset becomes the standard for measuring value, is it also considered the risk-free asset . If Bitcoin becomes the risk-free asset, then this fact may upend what Modern Portfolio Theory may consider an optimally efficient, risk-adjusted portfolio. If Bitcoin replaces the risk-free asset, its beta will become equivalent to zero. Suddenly, other cryptocurrencies that outperform Bitcoin, like Ether, may become assets that all efficient risk-adjusted portfolios must contain. This is where my current research ends: The intersection of Bitcoin's mathematical tendency to replace the risk-free asset and how this could drastically impact the findings of Modern Portfolio Theory and the role played by traditional financial instruments.
It is perhaps no wonder then that traditional financial firms are scrambling to create a spot Bitcoin ETF. Bitcoin represents the next step in the evolution of financial markets. Bitcoin has created the first truly trustless monetary system by solving the Byzantine Generals' Problem . This problem of trust has plagued financial markets since the advent of credit, and could only previously be temporarily mitigated by increased money creation. However, this fiat approach always ultimately results in hyperinflation and the collapse of the monetary system.
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Special thank you to @SquishTrade for his editorial assistance. Also, a special tribute to Dr. Harry Markowitz , the father of Modern Portfolio Theory, who sadly passed away as I was researching portfolio theory for this post.
Important Disclaimer
Nothing in this post should be considered financial advice. Trading and investing always involve risks and one should carefully review all such risks before making a trade or investment decision. Do not buy or sell any security based on anything in this post. Past results do not guarantee future returns. Cryptocurrencies are highly volatile. Never borrow money or use margin to invest in cryptocurrency. Cryptocurrency is not backed or insured by any authority and is therefore a high-risk asset class. You can lose all or some of your money in cryptocurrency. Please consult with a financial advisor before making any financial decisions. This post is for educational purposes only.
The Great StagflationIn this post, I will present a compendium of higher timeframe charts to show why it's likely that the U.S. economy, and likely much of the global economy as well, is heading into a period of stagflation. I have termed this coming period "The Great Stagflation" because I believe this is how the mid-2020s will be characterized in retrospect. The term stagflation refers to a period when economic growth slows or declines, unemployment increases and inflation remains elevated. To listen to my full thoughts on stagflation, and my thoughts on why I believe we're already in a recession, you can watch my video below.
Chart 1 - S&P 500 Yearly Chart (SPX)
This chart shows a downward oscillation of the Stochastic RSI on the yearly chart of the S&P 500 index (SPX). This degree of strong downward momentum on the yearly chart of SPX is rare and has only occurred just three times in the past 100 years: the Great Depression, the 1970s Stagflation, and the Dotcom Bust. In each case, the stock market stagnated for a period of at least a decade.
Chart 1a
This chart shows the several important Fibonacci levels on the highest timeframe on the S&P 500 (SPX). What this chart shows is that the market bottom in 2022 was right at the 3rd Fibonacci extension, when using the peak before the Great Depression and the lowest ever price for SPX as our reference point. It's possible that if the stock market falls below the market bottom from 2022 decisively, the next major Fibonacci support on the highest timeframe will be all the way down at the Dotcom peak (or pre-Great Recession peak), which is the 2.618 Fibonacci extension. This price level is highlighted in red.
Chart 2 - Producer Price Index (PPIACO)
This chart shows the Producer Price Index by Commodity: All Commodities (PPIACO). The Producer Price Index is a measure of the average change in the selling prices received by domestic producers for their output. It is calculated by the Bureau of Labor Statistics (BLS) and is reported on a monthly basis. It covers a wide range of commodities, including those used as inputs for goods, services, and construction, and is grouped into various stages of production, such as raw materials, intermediate goods, and finished goods. The Producer Price Index can be used as a leading indicator of Consumer Price Index (CPI). As we see in this yearly chart, the Stochastic RSI is showing strong upward momentum that is rising up from oversold conditions. This type of upward oscillation can add inflationary pressure for years to come, and can set the stage for stagflation.
Chart 3 - Stock Market Deflation vs. Commodity Price Inflation
This chart shows the S&P 500 index (SPX) compared against the Producer Price Index by Commodity: All Commodities (PPIACO). During periods of stagflation, the SPX/PPIACO ratio oscillates downward as commodity price inflation causes the Federal Reserve to tighten the money supply to curtail inflation. As a result, the stock market declines as commodity prices inflate. Thus, the yearly chart of the SPX/PPIACO ratio could be sending a warning that what we are dealing with is a period of prolonged stock market stagnation.
Chart 4 - Stock Market to the Moon
These quarterly (3-month) charts show the entire price history of the U.S. stock market (SPX) dating back to 1871. I applied a log-linear regression channel to give a rough approximation of the extent to which the stock market has deviated from its mean, or average price, over the years. In the fourth quarter of 2021 (Q4 2021), the stock market closed exactly at the +2 standard deviation from its mean price, the highest ever recorded on a quarterly closing basis. The chart on the right side shows a zoomed-in view, which shows how perfectly SPX reached the +2 standard deviation before declining. The mean or average price, which is visualized in the chart as the red line, is so far down, that it does not even appear on the zoomed-in chart. To put the meteoric rise of the stock market during the period of limitless monetary easing into perspective: It has been so extreme that it has actually rendered the extreme bubble of the Roaring '20s, before the Great Depression, as merely being an average stock market valuation.
Chart 5 - Supercycle Bearish Divergence
This chart ominously shows a major bearish divergence on the yearly chart of the S&P 500 index (SPX). Bearish divergence is when price creates a higher high while the RSI creates a lower high. Bearish divergence can warn of a coming reversal, as it reflects the notion that the bull run is becoming exhausted. Looking back 150 years, such an extreme bearish divergence has actually never occurred before on the yearly chart. This multi-decade bearish divergence could be indicating the start of a new Supercycle, or potentially even the start of a new Grand Supercycle -- one in which the stock market underperforms for years to come, as interest rates, or the cost of money, trends higher. Only time will tell how this will unfold, but this chart provides further evidence that we're likely entering a period that will be characterized by prolonged stock market stagnation.
Chart 5a
Volume has been declining during the formation of this bearish divergence.
Chart 6 - Stock Market Growth vs. GDP Growth
This quarterly chart shows Gross Domestic Product (GDP) on the left and the stock market (SPX) on the right. Applied to both charts is a log-linear regression channel. Notice how GDP is barely hanging on to the -2 standard deviation at a time when the stock market has blasted up to the +2 standard deviation. This extreme divergence has been made possible solely by the Federal Reserve's monetary easing experiment. The Federal Reserve has compensated for declining GDP growth by lowering interest rates even faster than GDP growth declines. By doing this, the Federal Reserve has made the cost of money so low that risk assets were able to rally, even as actual increases in productivity did not occur. The extreme divergence of extreme stock market outperformance coupled with extreme GDP growth underperformance is unsustainable, particularly in the face of commodity inflation. The Great Stagflation will likely see stock market returns stagnate, which in turn will more accurately reflect stagnating economic growth. The cycle of boom and bust is largely an inevitable eventuality.
Chart 7 - Price of Stocks vs. Price of Bonds
In a prior post, I discussed the meaning of this chart. Simply put, this ratio chart compares the price of the S&P 500 Index to the price of a risk-free Treasury bond (defined here as the 10-year U.S. Treasury bond). I applied a log-linear regression channel to illustrate the fact that despite all the tightening that the Federal Reserve has already undertaken, we are only just now at the historical mean for this ratio chart. What I am about to say next is quite dense, but see if you can understand my logic: Since the numerator of this ratio chart (SPX) currently has strong downward Stochastic RSI momentum on its yearly chart (which is depicted in Chart 1 above), and since this ratio chart has strong upward momentum on its yearly chart, then this suggests that the denominator (the price of a 10-year U.S. Treasury bond, written here as the inverse of its yield {1/US10Y}) is likely to head down faster than numerator (SPX) does, thereby allowing the ratio to move up and reach the +2 standard deviation of the regression channel. Since the price of bonds moves inversely to the yield, this ratio chart is ominously warning that the yields on 10-year Treasury bonds may move much higher in the years to come. If Treasury yields are moving higher this is likely because inflation continues to be persistent. Such a tight monetary environment, coupled with persistent inflation, is likely to result in stagflation. To read more on the meaning of this chart, you can view my post below.
Chart 7a
This chart is similar to the previous, except that real rates are used. With real rates rising so drastically (and therefore bringing down bond prices) as a ratio to the S&P 500, it creates the appearance that the stock market is becoming more and more overvalued, even as it nonetheless sells off! This reflects a massive dislocation in capital. Over time, capital will flow out of the stock market and into less-risky and higher-yielding Treasury bonds, particularly since commodity inflation is unlikely to abate and thus Treasury yields will remain elevated.
Chart 8 - The Real Cost of Apple (AAPL)
This chart shows the price of Apple's stock (AAPL) compared against the price of a 10-year U.S. Treasury bond. Over the past year, Apple's great balance sheet and high cash flow, has made it seem like a safe haven relative to more speculative risk assets and companies with negative cash flow. Yet, when compared against the actual safe-haven asset (the 10-year U.S. Treasury bond), the premium in Apple's price could not be higher. The price of AAPL for the current yield on a 10-year U.S. Treasury reflects a capital dislocation (the biggest ever). In other words, too much capital is in Apple's stock for the yield on a 10-year U.S. Treasury to be as high as it currently is. An efficient market would cause capital to flow out of Apple's stock and into less-risky and higher-yielding U.S. Treasury bonds over time, especially since persistent inflation is likely to keep Treasury yields higher for longer. Since Apple is a component of many exchange-traded funds (ETFs) and mutual funds, the decline in its value may cause the entire stock market to decline. As unemployment rises, the stream of passive contributions to mutual funds and ETFs will slow and reverse as drawdowns and hardship withdrawals increase. Higher unemployment will also lead to less consumer spending on Apple's products and services causing an earnings recession. Finally, rising geopolitical tensions between the U.S. and China may severely disrupt supply chains. Apple stands to gain little, but lose a lot in the years to come.
Chart 9 - High-Yield Corporate Bonds vs. Money Supply
The symbol in chart is a bit dense to understand, but upon deciphering it, one can understand that it warns of a coming liquidity crisis for companies with lower credit ratings. First, BAMLH0A0HYM2EY is the symbol for the all-in effective rate of high-yield corporate bonds. This represents the cost of borrowing for companies with lower credit ratings. Second, the denominator is the M2 money supply in the U.S. Finally, the chart is adjusted by an arbitrary multiplier to remove visual distortion. The effective yield that companies (which the market considers to be risky) must pay on their bonds has increased rapidly relative to the supply of money, the latter of which has actually been decreasing at a record pace. This is a liquidity crisis in the making for companies that have low credit ratings and which need constant infusions of new debt to maintain financial viability. If the amount of money needed to finance new debt is increasing at a record pace as the supply of money decreases at a record pace, then the amount of money in the economy available for these companies to earn, so as to be able to finance their debt, will quickly become insufficient as a matter of mathematical certainty. Thus, a liquidity crisis is largely inevitable, particularly since the central bank may not be able to intervene to the extent that would be needed to avert such a crisis without worsening commodity inflation. As we can see in the monthly chart, the EMA ribbon which acted as resistance, has been broken. Even as the Stochastic RSI oscillates down, price is remaining above the EMA ribbon for the first time since the Great Recession.
Chart 10 - Persistent Inflation
This chart shows just how persistent inflation has been. This ratio chart compares iShares TIPS Bond ETF which tracks an index composed of inflation-protected U.S. Treasury bonds (TIP) to iShares 7-10 Year Treasury Bond ETF (IEF). For the first time ever, the Stochastic RSI (which is shown on the bottom) has oscillated fully down to oversold levels on the monthly chart while price remains above the EMA ribbon. This suggests a major trend change may have occurred in that the EMA ribbon, which has generally held as resistance, may have flipped to support. This leads us to conclude that inflation may be persistently elevated for longer than anticipated. So long as inflation remains high, central banks must keep interest rates, or the cost of money, high as well. Compare the current situation to the Great Recession when inflation quickly turned into deflation, which allowed the central banks to pivot to monetary easing. One might question whether this monthly chart is showing a... bullflag?
Chart 11 - Commodity Inflation Supercycle
Similar to the previous chart, this chart shows Invesco DB Commodity Index Tracking Fund (DBC). DBC is composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world. Each candlestick in this chart represents a 2-month period. What this chart shows is just how persistent commodity inflation has been. Despite nearly an entire year of monetary tightening at a record pace, commodity futures are only very slowly disinflating. Compare this to the Great Recession, when commodity prices rapidly deflated. This time around it is likely that commodity prices will remain elevated even as economic growth slows. This is occurring because commodity prices have entered into a new supercycle, and this new supercycle of higher commodity prices will likely result in The Great Stagflation.
Chart 11a
It appears that if anything, DBC is presenting a bull flag pattern on this higher timeframe chart. This could stymie the Federal Reserve's ability to pivot to easier monetary conditions should unemployment begin to rise rapidly or should corporate liquidity issues mount.
Chart 12 - Cost of Energy
This chart shows the price of American multinational oil and gas corporation, ExxonMobil (XOM). Price has been ripping higher after bouncing on the -2 standard deviation regression channel line during the pandemic shutdown. Now, the yearly Stochastic RSI is showing strong upward momentum. This suggests that the costs of energy, including fossil fuel energy, will trend upward for years to come, even as economic growth slows. Similar patterns as this are appearing across virtually all charts in the energy sector, including in sustainable energy (hydrogen, uranium, etc.). Since energy is considered a commodity, these charts patterns buttress the assertion that commodity prices may continue to inflate in the years to come. In my post below, I note how the hydrogen energy company Plug Power (PLUG) looks to be in a log-scale bull flag pattern. (Not a buy or sell recommendation)
Chart 13 - Coffee
This chart shows that coffee futures bounced after undergoing a Fibonacci retracement to the 0.618 level. Now, long lower wicks are forming on bullish reversal candles, indicating that prices are likely to attempt a rally on the monthly timeframe. This is yet another warning that commodity inflation may remain persistent.
Chart 14 - Eggs
This chart, with a seemingly cryptic symbol, shows the price of eggs (specifically, the price of one dozen of large, Grade A eggs) compared against the U.S. money supply (M2). The chart is actually quite ominous, and I'll explain why. The price of eggs is soaring at a record pace even as the supply of money is shrinking at a record pace. For the first time on record, the price of eggs relative to the supply of money has reached a level above the 6-month EMA ribbon, which has historically always acted as resistance. From a conceptual perspective, what this chart actually means is that more of consumers' wealth must go into meeting their basic food needs. Thus, consumers will have less wealth to spend on other goods and services. Since eggs are inferior goods, meaning that one's demand for eggs increases as one's income goes down, the soaring price of eggs may actually be confounded by increasing demand (alongside supply constraints). If demand of these inferior goods increases as unemployment goes up, and eggs remain scarce, the price can soar even higher as the below chart suggests.
This chart shows the yearly Stochastic RSI is only now just beginning to oscillate up. This means that the upward pressure on the price of eggs may last for years to come. Of course, eggs are commodities. When commodity prices inflate even as the central bank tightens the money supply, this may result in stagflation. Commodity inflation is a central bank's worst nightmare because it makes it difficult to pivot to easier monetary conditions to stimulate a slowing economy. If a central bank pivots to easier monetary conditions before commodity inflation is mitigated, then commodity prices will not just continue to rise, but they may hyperinflate. Thus, this inflationary spiral in the price of eggs is sending an ominous warning about the coming Great Stagflation.
Chart 15 - Money Supply
This chart shows that for the first time, when looking back to 1960, the U.S. money supply (M2) actually declined year-over-year. The amount of dollars removed from the money supply in 2022, could carpet the country of Luxembourg and spill into Belgium, Germany and France, or if each dollar were lined up lengthwise, would span the distance from earth to the moon more than 100 times over. Fortunately though, enough dollars still exist within the M2 money supply, that if each dollar was lined up lengthwise, it would reach from earth to past Uranus, the second most distant planet in our solar system.
Chart 16 - The Fed's Balance Sheet
The chart on the left of the two charts shown above, shows what appears to be the Federal Reserve rapidly rolling off assets off its balance sheet in 2022, and into 2023. However, when put into perspective, as illustrated by the chart on the right, the past year of balance sheet rolloffs barely scratches the surface of the total amount of assets that the Federal Reserve added to its balance sheet over the decades of monetary easing. In the years to come, the global financial system will have to grapple with the consequences of the monetary easing experiment ending.
Chart 17 - Dollar Index (DXY)
This chart shows what appears to be the U.S. dollar index (DXY) breaking out of a bull flag on this yearly chart. In doing so, it is also breaking out above the resistance of its EMA ribbon, as shown in the chart on the right. On a conceptual level, by tightening the money supply more than the central banks of other countries, the Federal Reserve is effectively exporting inflation to those countries, and averting domestic commodity shortages. Yet, as with everything, there are disadvantages to doing this. Tightening the U.S. money supply too much can cause global liquidity issues since the U.S. dollar is the world's reserve currency and most global debt is denominated in it. Already the Bank for International Settlements (BIS) has warned of dollar liquidity issues in the FX swaps and forwards market. If commodity inflation resurges, and forces the U.S. Federal Reserve to hike more than anticipated, this could cause a global liquidity crisis. Destabilizing the fragile and highly leveraged dollar-denominated global debt and derivatives market could ultimately accelerate the move away from the dollar standard. This Catch-22 is likely to result in a Great Stagflation.
Chart 18 - Soaring Risk-Free Rate
This chart shows a clear trend break in the yields of 10-year U.S. Treasury bonds. The era of lower and lower interest rates over time is over. In theory, when the interest rate on a bond rises, this occurs because the market perceives greater risks associated with holding that bond. Therefore, the rapid rise in the risk-free rate (10-year U.S. Treasury yield), means that suddenly this risk-free asset is more... risky. Since holding any other asset, except physical cash and physical gold, is considered some degree more risky than holding U.S. Treasury bonds, then all other assets become more risky as well. One would expect this to happen as the monetary easing experiment comes to an end, and the everything bubble deflates.
Chart 19 - Extreme Yield Curve Inversion
This chart shows the yield curve inversion between the 10-year U.S. Treasury bond and the 3-month U.S. Treasury bill. Just days ago, the inversion slipped to the steepest inversion since the early 1980s. This is often considered a reliable recession indicator because these yields have never inverted without a recession ensuing. Effectively, these yields only invert because the central bank is tightening the money supply. When yields are inverted, bank lending declines because banks can no longer profitably borrow at short term rates to lend at long term rates. Since bank credit creates the most amount of money in a capitalist economy, a yield curve inversion is a warning of impending decline in the money supply, and therefore an impending decline in corporate earnings and consumer spending. Corporations can only earn, and consumers can only spend, some subset of the total money supply. Right now, that warning is blaring the loudest it has in over 40 years. In fact, we've never had such a steep inversion while the global economy is as leveraged as it is. Only time will tell how this will play out, but it's unlikely to end well.
Chart 20 - Volatility (VIX)
This chart shows the Volatility S&P 500 Index (VIX) in a years-long symmetrical triangle pattern. This triangle pattern will likely end at some point this year, or early next year. Since the yield curve is inverted, this pattern will quite likely end with a breakout. Indeed, the yearly Stochastic RSI momentum for the VIX is upward, as shown in the chart below.
Chart 20a
As noted above, this chart shows that the yearly Stochastic RSI for the VIX is on a bull run.
Chart 21 - Job Openings
This chart shows that job openings reached the +2 standard deviation from their mean in early 2022. This was likely not just a business cycle high, but more likely, this was a supercycle high. The U.S. economy is unlikely to achieve such a high amount of job openings again for the foreseeable future. Since GDP growth barely substantiated such a high amount of job openings, one may conclude that this occurred due to excessive economic stimulation that denotes the monetary easing experiment.
Chart 22 - Dow Jones Industrial Average Index (DJI)
This chart shows that even with the declines in 2022, the Dow Jones Industrial Average Index (DJI) remains at an extremely overbought level. The only other times the DJI has been as overbought as it is now was before the Great Depression and before the Dotcom Bust.
Chart 23 - International Stock Markets
This yearly chart compares the performance of S&P 500 (SPX) to that of the Deutsche Boerse AG German Stock Index DAX (DEU40). As you can see, it looks like the SPX is set to underperform the DEU40, possibly for years to come. Technically, the DEU40 can outperform the SPX by falling by less than it. Thus, this chart does not speak to absolute performance.
Chart 23a
This yearly chart compares the performance of S&P 500 (SPX) to that of the NIFTY 50 (NIFTY). The NIFTY is a benchmark Indian stock market index that represents the weighted average of 50 of the largest Indian companies listed on India's National Stock Exchange (NSE). It looks like the NIFTY has formed a years-long bull pennant relative to the S&P 500, and that the former could be ready to outperform its U.S. counterpart for years to come. It seems that in a defragmenting world with rising tensions between global super powers, a largely neutral India could be poised to outperform. So far, India has become a beneficiary of sanctions on Russia in that it has been able to purchase energy at discounted prices from the latter. Discounted energy prices, in a world that is otherwise struggling with commodity inflation, is a unique advantage that may explain why the NIFTY is set to outperform. Cheap energy enables strong economic growth.
Chart 24 - Emergence of Bitcoin
Let's go on a journey through time to measure just how disruptive the emergence of Bitcoin has become to traditional financial markets.
This chart shows that, in just over a decade's time, Bitcoin has generated more wealth for an investor than the S&P 500 has generated in the past 150 years. Of course, such performance is not sustainable, and the returns of Bitcoin will become less and less impulsive with each successive halving cycle, which is mathematically consistent with a log growth curve function.
Chart 24a
This chart shows that the central bank can use interest rates to deflate the price of risk assets. As Treasury yields rise, risk assets typically decline. This shows that individuals' wealth is controlled by central governments.
Chart 25 - Stock Market Decay
This chart shows the performance of the U.S. stock market (SPX) compared against the performance of Bitcoin over the past ~15 years. There has never, in the history of the stock market, been an asset class that actually turns the exponential growth of the S&P 500 into a decay function like this. Bitcoin has become too disruptive to traditional financial markets, and is undermining central banks' ability to control individuals' wealth. Thus, central banks are preparing to deal with this problem. The solution will likely be in the form of CBDC which will restrict one's ability to convert fiat currency into decentralized cryptocurrency such as Bitcoin. Yet, CBDC can also result in unprecedented control by central governments of the way in which humans transact.
In the coming months, I plan to write a research-based post on Bitcoin, cryptocurrency, and the ways in which blockchain technology and non-fungible tokens (NFTs) will revolutionize the way humans transact, authenticate ownership, and verify originality in a digital space. But for this technology, in a digital world denominated by AI, it will become impossible for humans to distinguish between what is real and what is not.
Important Disclaimer
Nothing in this post should be considered financial advice. Trading and investing always involve risks and one should carefully review all such risks before making a trade or investment decision. Do not buy or sell any security based on anything in this post. Please consult with a financial advisor before making any financial decisions. This post is for educational purposes only.
Could BTC's Trendline End Not with a Bang But a Whimper?Primary Chart: Fibonacci Channel and Symmetrical Triangle
Title alludes to a well-known excerpt from T.S. Elliot's poem called "The Hollow Men":
This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper.
Setting Aside Bias Temporarily to Allow Greater Flexibility in Analysis
Many of my recent posts on cryptocurrencies have been presented with a bearish bias. A bearish view has been warranted, after all, because the technicals have left almost no room for a bullish short-term or intermediate-term view. Some of my recent posts have been neutral, however, to evaluate and explore more fully all possibilities within the context of support and resistance levels, price action and other technical factors.
Unfortunately, BTC's price chart has not yet turned bullish given the price structure. And positive / bullish divergences mentioned by some long-term crypto investors cannot count until they are confirmed by a reversal in trend structure.
This post attempts to set aside bias temporarily to present a variety of technical evidence as objectively as possible. The goal is to remain relatively neutral to allow a more complete examination of the price charts and technicals without the influence of a particular predetermined goal or conclusion. This might allow for greater flexibility to follow the unexpected turns that prices often take.
BTC's Relative Strength in Recent Weeks
In a recent bearish post, after listing several arguments for the bears, I discussed one argument for the bulls—BTC's relative strength. On October 2, 2022, my post stated: "One argument for the bulls is that BTC's sideways chop action has resulted in its relative strength becoming quite impressive. Equity indices have been plummeting sharply since mid-August 2022 with little reprieve. But BTC during this time has largely chopped sideways after losing a few key levels in late August and early September 2022."
This relative strength can be examined more closely by looking at a spread chart that divides one instrument's price by the price of an index or some other price reference for comparison. The chart below shows a spread (or ratio) chart of BTC / SPX, showing BTC's relative strength compared to a leading equity index, the S&P 500 ( SP:SPX ).
Supplementary Chart A: Spread Chart Showing BTC's Relative Strength vs. SPX
www.tradingview.com
Note how this spread chart has broken above a nearly 11-month downward trendline. Some may draw the conclusion too quickly that this suggests a trend reversal, such as from a downtrend to an uptrend. But a break above a down trendline by itself merely suggests a shift from that particular downtrend to either a less steep downtrend or a more neutral trend, which could then lead to a period of sideways chop for some time or it could lead to a trend reversal as well. But a reversal to an uptrend requires a change in trend structure, which is a process that takes time to form and has not occurred yet.
Another aspect of BTC's relative strength exists. It has not broken its June 2022 lows as many equities and equity indices have done. Until that changes—it could break those lows at any time—this technical evidence is an alternative way of viewing BTC's relative strength.
BTC's relative strength has improved even though BTC has largely churned and chopped sideways for the past weeks and months. This is because many asset classes have been steadily declining, some even plummeting, since mid-August 2022 peaks. Any asset or instrument will have relative strength when it moves sideways while equity indices continue to decline. The sideways consolidation will be discussed in greater detail in the next section.
BTC's Recent Consolidation and Volatility Compression
BTC's price has chopped steadily around a key Fibonacci level of $19,246 for the past several weeks since mid-September 2022, and even for a number of days in late August 2022 as well. This consolidation has been noteworthy given that equity indices have plummeted during this time. When an asset moves sideways while equity indices steadily decline results in relative strength (outperformance) of that asset as discussed in the previous section.
Supplementary Chart B: Recent Consolidation Range Containing Price
And during this lengthy consolidation, the compression in volatility has been quite significant. The next chart compares the levels of volatility by using a famous volatility indicator called the Bollinger Bands (set at 2 standard deviations from the mean) on a daily chart. Parallel channels have been drawn over various sections of the Bollinger Bands to give a visual comparison of the volatility levels and volatility compression levels over the past several months. Note how wide the Bollinger Bands expanded as a result of the high volatility associated with steep selloffs. And the periods of volatility compression (squeezes) often preceded those periods of high volatility and large directional moves downward.
Supplementary Chart C: Bollinger Bands (2 Standard Devations) with Channels for Visual Aid in Comparing Volatility Levels
Most importantly, note how the tightly compressed the current volatility in price has become, i.e., note how narrow, the Bollinger Bands are now. They are more narrow perhaps than at any other time during this bear market. If history is any guide, such a period of compressed volatility (a squeeze) implies that a sizeable increase in volatility associated with a large directional move will soon follow. Because the trend has been down, the odds would seem to favor a downward flush. But BTC's relative strength causes one to wonder whether a massive bear rally may be imminent.
So traders should be prepared for any scenario where price could move dramatically. This is why my stance became more neutral for purposes of a thorough evaluation of price action. Because BTC is at a make-or break juncture in the short-to-intermediate term, it helps to stay open to all possibilities rather than staying rigidly fixated on the obvious bearish view. Being flexible and nimble can help traders remain more keenly aware and prepared for shifts that can occur at any time.
VWAPs and Linear Regression Channel
Even if the charts may be shifting in subtle ways, some of the technical evidence still firmly supports the existence of a downtrend. Shorter-term VWAPs \ show that the current price remains under the volume-weighted average price for a variety of different lookback periods. This means that the average buyer is losing money and the average seller remains in control for each of these VWAP periods.
Supplementary Chart D: Various VWAPs from All-Time High, March 2022 High, June 2022 / YTD Low, and August 2022 High
Further, longer-term VWAPs remain in favor of the bears as shown in a separate post from September 24, 2022 (linked as Supplementary Chart E below). The linear regression channel from the all-time high to the present, which was drawn a few days ago (also linked as Supplementary Chart E), suggests that the downtrend remains very much in effect, and that evidence should not be dismissed.
Supplementary Chart E: Linear Regression Channel and Long-Term VWAPs
Price at Apex of Various Consolidation Triangles
The consolidation in price may be viewed from another helpful perspective—the various triangles that have formed. Triangles generally develop as a narrowing trading range (consolidation) as upper and lower trendlines converge under compressing volatility conditions. The Primary Chart shows a symmetrical triangle, which by definition does not imply a direction to the breakout. Price has reached the very apex of this triangle.
Price has also reached the apex of two other right-angled triangles shown below. Right-angled triangles (also called descending or ascending triangles) do imply a directional bias via the sloping trendline that intersects with the horizontal trendline. In this case, the two alternative right-angled triangles (shown in Supplementary Chart F below) imply a downward directional breakout. But right-angled triangles, like other technical patterns and indicators, do not work perfectly to guarantee that the breakout will occur in the implied direction. Some right-angled triangle breakouts occur in a direction opposite from what is expected, which can make the breakout even more sharp because it catches market participants off guard.
Supplementary Chart F: Multi-Month Right-Angled Triangle
Supplementary Chart G: Second Right-Angled Triangle
BTC's Price at Critical Juncture
In conclusion, BTC's price now trades at a critical juncture. A breakout in price from the very apex of several different triangles could occur within a day or two. The compression in volatility has been quite substantial, implying a larger than normal directional breakout move. Combine this compression in volatility with the fact that BTC has not made a new low, has shown relative strength vs. blue-chip indices, and it would seem that traders should be prepared to react to whatever might happen.
Price has also reached the 11-month downtrend line shown on the Primary Chart as the zero line of the Fibonacci Channel. Price could continue chopping sideways right through that down trendline without much ado. That would perhaps be one of the most frustrating outcomes for bulls and bears alike, which is why the title to this article was chosen.
And at this point, it would appear that just about anything can happen—an eye-popping bear rally, a few major whipsaws up and down over the next several weeks, a major continuation move in the downtrend. Or price could just drift sideways through the 11-month downtrend line, ending it not with a bang, but a whimper. While predicting may feel satisfying, the better approach in this case may be to wait and allow price to tell us which way it wants to go.
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Author's Comments:
(1) Thank you for reviewing this post and considering its charts and analysis. The author welcomes comments, discussion and debate in the comment section. Shared charts are especially helpful to support any opposing or alternative view.
(2) This technical-analysis view does not constitute a trade recommendation or trade setup. Instead, it attempts to offer technical commentary that describes and analyzes price levels, trends, price action, or the broader technical environment as of the publication date. Technical-analysis commentary does not equate to trade setups or recommendations. Within a given price environment, traders bear responsibility for their own trading strategy, risk tolerance, and time frame, and for any due diligence associated with such trades.
(3) This technical-analysis viewpoint could change at a moment's notice, e.g., when price violates a key level of invalidation for a particular view. Further, proper risk-management techniques are vital to trading success.
(4) To the extent countertrend price moves are discussed, consider that countertrend or mean-reversion trading, e.g., trading a rally in a bear market, remains higher risk and lower probability even for the most experienced traders and investors.
DISCLAIMER: This post contains commentary published solely for educational and informational purposes. This post's content (and any content available through links in this post) and its views do not constitute financial advice or an investment or trading recommendation, and they do not account for readers' personal financial circumstances, or their investing or trading objectives, time frame, and risk tolerance. Readers should perform their own due diligence, and consult a qualified / licensed financial adviser or other financial or investment professional before entering any trade, investment or other transaction.
LTCUSD/BTCUSD - BEARISH CYCLE STILL IN PROGRESSWhilst I have shared this spread chart of LTCUSD/BTCUSD several times over the last 18 months or so, I have not directly published this as a main chart.
However, as requested by quite few Crypto traders, I feel it is appropriate to so.
This spread charts like any ratio charts can help to gauge potential trend change, but it must be used with care. Since what you are doing is looking at price behaviours of one instrument against another similar instruments in the form of price ratio.
When this is compared with the actual price of the 2 instruments concerned, it would be observed that during the bullish cycle the riskier of the 2, tends to lead to the upside and also during the bearish cycle to the downside.
Logic behind this is that, in rising market traders are willing to take on higher risk for potentially higher return, in doing so they tend to buy instrument that could give them potentially higher return but which also exhibit higher risk profile.
In my experience, this types of relationships could be observed in ratio charts of SP500/Dow Ind, Silver/Gold etc,. Similar ratio analysis is very powerful part of intermarket analysis and could give advance warning of potential trend change or help to confirm it.
Ration analysis could be applied by anyone interested in adding unique perspective on major trend analysis. I covered this topic in details during a relatively long live session which you could view on Youtube - link www.youtube.com
However, caution needs to be exercised as the ratio chart could have potential trend change whilst both the base instruments might still be continuing the trend, except one might move less than the other and temporarily consolidate. On resolution of this in might continue in the existing trend. Nevertheless, strength and weakness are often seen first in the ratio chart.
In this instance both LTCUSD & BTCUSD formed major all time high in Nov 2013, which was accompanied by corresponding high in the ratio chart.
Applying similar technical analysis on ratio chart as applied on the base instruments, it is evident that the ratio chart has continued declining along with them.
Elliott Wave analysis on the ratio suggests, that this ratio chart has some way to go before completing this cycle. Cross checking the ratio chart with the based instrument's respective price charts, it might be possible to get heads up when this bearish cycle or phase is near completion.
Once the low is formed, both the base instruments too would have or be close to posting similar price lows but it might not be the final low in the sense that this might be just the larger cycle wave A from Nov 2013 high and any price progressions to the upside might be retracement. Just a thought to keep in mind at this stage.
As always, do your own analysis for your trade requirement.
Select to follow me and the chart for notification of future updates. If you like the analysis then please indicate this by thumbs up, comments and sharing it with others. If you have an alternative idea then please share for all to learn from.
Thank you for taking the time to read my analysis.
DanV
danv-charting.com
Bitcoin vs Gold chart is one for the charting textbooksClassical charting principles has worked wonderful on the BTC/Gold ratio chart. Currently at 26.x, a decline to as low as 16.x could occur without disrupting a bullish interpretation of the chart.
