Editor’s note: Today, you’ll hear from master trader and Market Wizard Larry Benedict.
He draws a connection between all the noise around bitcoin’s movements and the stock market… and how if you pay enough attention to the cryptocurrency’s price action, it might hint at the market’s next move.
And once you notice the pattern, you can start using it to get ahead of the stock market’s next shift…
There’s a lot of noise around bitcoin.
But there’s a message for stock investors in bitcoin’s noisy movements.
Because if you follow bitcoin’s price action closely enough, you’ll see that it can hint at the next move in the stock market.
That’s because it can help us determine investors’ collective mood and willingness to take risks.
When the crowd starts making more bullish bets in speculative asset classes like cryptocurrencies, that’s a good sign that stocks will follow.
The opposite can be true as well.
So when bitcoin starts moving, pay attention.
Today, let’s take a look at what it’s saying could happen next…
Tipping the Stock Market’s Trend
Bitcoin has a history of leading key directional changes in the stock market.
Just look at the price action over the past year to see what I mean.
In the chart below, you can see that bitcoin peaked last summer at “1” several weeks ahead of the S&P 500 (“a”). The market went on to decline by 10%.
Then bitcoin found a bottom at “2” and started moving higher well ahead of the S&P 500 (“b”).
In fact, bitcoin led the S&P 500’s recovery by over a month. It suggested investor greed was still present… and that stocks could recover.
But look at what happened at “3.”
Bitcoin recently peaked and turned lower on March 13. That preceded the peak in the S&P 500 (“c”) by about two weeks.
The S&P 500 went on to decline by 5%. But it’s now recovering and is close to testing the prior high.
And bitcoin isn’t keeping up.
So this diverging bitcoin trend could spell trouble for the stock market…
Bitcoin Is Bearish
During the March peak, bitcoin was flashing a major warning sign of a top. The Relative Strength Index (RSI) was diverging negatively from price at that time.
You can see that in the chart below. Bitcoin moved above the $70,000 level in March. But the RSI started making lower highs (shown with the dashed trend line).
The RSI got even worse when bitcoin came back to retest $70,000 again in early April.
Since then, the RSI has been under 50. That shows weak price action.
This is also evident in bitcoin’s downtrend, making lower highs and lower lows.
But here’s where things get concerning…
Bitcoin’s price action has stayed bearish despite the S&P 500 trying to recover.
The S&P 500 made a recent low on April 19 and is moving back above its 50-day moving average (MA).
But bitcoin’s price action remains stuck in a downtrend.
Bitcoin is also below its 50-day MA (blue line in the chart) while the RSI is under resistance at 50.
With this in mind, investors have another reason to approach the recent rally in the S&P 500 with caution.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict