Interest Rate Hikes & Historical SPX Behaviour offer Counter Intuitive Insights
Bitcoin is poised for a recovery amid emerging macro tailwinds which are beginning to show signs of a return to a ‘risk-on’ market.
Let’s dig in.
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Key BTC/USD Liquidity Resting Higher
Bitcoin/Dollar closed an 8th consecutive red weekly candle, falling 3.2% over the prior close at $30,200.
The coin closed a weekly pin-bar reversal candle above the $30,000 psychological support and is poised for a recovery this week, potentially on the back of traditional market tailwinds in the short term.
Zooming in on H1, BTC/USD exchanges hands at $30,400, with key liquidity resting higher.
A sweep of the lows ($28,000) would likely be followed by a move higher into key liquidity above $32,000. Provided the intra-day sell-off happens first, the likelihood of running it back turbo is very high in my view.
On a macro scale, some interesting historical observations are present when US Interest rates are overlaid with the S&P500. Historically, when the Fed increases interest rates, the SPX rallies significantly.
Between 2004–2007, the SPX increased by 31%, and 42% between 2015 and 2017. On both occasions, the US Federal Reserve was tightening its monetary policy after a period of easing (buying assets, easy money). One probable explanation is that the market is forward looking, in relative terms.
This is to say that markets price perceived high-probability events before they take place, leading to a seemingly counter-intuitive market dynamic. Similar speculative arguments are made for common phrases such as ‘buy the rumour sell the news’, the premise of which is the same.
SPX Descending Broadening Wedge
The S&P500 tanked 20.8% since reaching its all-time highs in January. Over the course of Q1-Q2, prices fell into the value area just under $3,900 so far.
In doing so, market structure developed into a text-book descending broadening wedge, the target of which is the top of the formation in the event of a statistically likely breakout.
This is only relevant to the extent that “risk-assets” are viewed as a basket of assets and the Bitcoin-stock-market correlation holds. Given that many disparate markets were correlated to one during the downtrend (commodities too), I’d expect BTC-SPX/Nasdaq correlations to begin diverging, even if it’s only a corrective move.
Dollar Index Tops Out?
While the USD Index has no direct influence on Bitcoin (as over 50% is measured against the Euro), it may offer confluence for a rotation into risk assets moving forward.
Currently, the DXY is facing macro sell-side pressure after four months of strengthening. The potential top was at 105, which is an issue for the Biden administration if its goal is to strengthen the country’s manufacturing sector. If the Dollar loses strength, this may be another tailwind for risk-assets which ultimately propels a longer term bitcoin recovery in 2022.
p.s. This is my opinion. It is not financial advice.
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