As the Coronavirus pandemic continues, amateur investors are wondering when is the best time to invest in the stock market again. The major indexes such as the S&P 500, an index that tracks the top 500 US companies, and the Dow Jones Industrial Average, an index that tracks the top 30 US corporations, saw a large uptick in trading on Thursday, March 27th.
This uptick has led many to believe that we might have seen the bottom of the market as retail investors (amateur investors) start to flock in the hopes to take advantage of the market recovery that they are expecting.
However, analysts around the globe are stating that this is a major ‘bull trap’ and investors should be extremely cautious. Some analysts have gone as far as stating that this bull trap is similar to the bull trap that was seen during the 1929 Great Depression.
In this article, I would like to cover what is going on in the wider economy and analyze how Bitcoin might react to this upcoming bull trap market dump that is expected. Will Bitcoin continue to decouple from the overall economy and increase? Or will it go on to fall in tandem with the entire economic crisis that is looming?
So, What The Hell Is Going On?
The Dow Jones increased by over 1300 points on March 27th, making it the largest increase on record since the 1930s! You can see this increase for both the S&P 500 and the Dow Jones Industrial Average on the 2 charts below;
This chart shows the Dow Jones Industrial Average (DJI). We can see that it had hit a high of almost 30,000 points before it went on to fall by a significant 37% as it went as low as 18,500 points during the recent price decline. We can see that, over the past 2-days, the DJI increased by a whopping 22% as it increased by 4,000 points to reach 22,500.
This chart shows the S&P 500. We can see that this market also dropped by a significant 35% as it fell from the peak earlier in February. Over the past 2-days, the SPX managed to increase by 22% to reach above $2,600 before falling slightly.
These two major increases in these indexes over the past couple of days has started a wave of retail investors to wonder if this is the best time to pick up some stocks at very cheap prices. You only need to take a look at the Google Search trends to get an idea of how many people are searching for “how to buy stocks” to gain some form of an idea as to what is going on.
The fact that they are searching how to buy stocks shows that this interest is coming from amateur investors that have never actually bought any stocks before in their lifetime. Additionally, prominent stock traders on Twitter are further confirming this sentiment;
So, Where Is The Danger In All Of This?
If you were to look at the strong price increases over the previous 2-days, you might be wondering “what is the problem here?”. Well, this is a very extensive question and I will try to cover the important bases for you.
Firstly, the US Federal Reserve is quite deep into contemplating a $6 trillion stimulus package, yes - TRILLION. What this basically means is that they are about to print $6 trillion worth of new money to pump back into the economy. It pretty much shows that the US has unlimited money in trying to combat this upcoming recession.
However, on the other hand, we need to bear in mind that this Coronavirus pandemic is CONTINUING with pretty much no end in sight. We can only assume that things are going to get worse for the US (and the rest of the globe). With more deaths will come more uncertainty and panic which would result in further declines within the stock market.
This combined with the fact that there are now over 3 million unemployment claims in the US shows how fragile the economy is right now. We can’t just expect the stock market to recover just like that over the course of 2-days! Furthermore, once quarterly earnings start to appear for all of these major US companies, people will start to realize how poorly the economy is actually performing which will again result in further stock market declines.
You can see how all of these factors do not seem to add up to a stock market recovery in the slightest!
One more thing I would like to add is that the media does not help too much in all of this, especially when large publications such as The Wall Street Journal make Tweets such as the following;
You can see how this might entice people to start Googling “How to buy stocks” however, the majority of people may not know that the WSJ is actually owned by the Dow Jones Company that they are reporting on.
You can see a clear conflict of interest in all of this.
All of these factors combined are why many analysts are warning retail investors about a potential bull trap.
What The Heck Is A Bull Trap?
In layman terms, it is what it says on the label - a trap for the bulls. You see, this major uptick in the indexes has created a strong positive buy signal and investors will act on this bullish signal when they start buying stocks. However, the trap comes into play after investors have bought stocks and the market reverses again.
The investors are long and as the market reverses again and falls they are ‘trapped’ within their stocks unless they decide to sell at a loss.
A great example of a bull trap is the late 1920’s Great Depression bull trap which you can see on the chart below;
You can see that the green arrow marks where people thought the ‘bottom’ of the market was which caused people to start investing. However, a few days later, the market reversed and fell through the apparent ‘bottom’ causing investors to lose more money as the market continued crashing.
The scary thing about the current bull trap is that analysts believe that this trap might be akin or even worse to this 1929 bull trap - which would be devastating for the economy!
So, What Does This Mean For Bitcoin?
Truth be told, nobody really knows. Last week we were all celebrating about how Bitcoin was apparently decoupling from the rest of the economy as the number one ranked cryptocurrency started to move sideways whilst the wider economy continued to tank. Well, the following is a chart of that apparent decoupling today;
The chart above shows Bitcoin (orange line), the DJI (blue line), and the SPX (purple line). Last week, the decoupling was indeed on the table as the blue and purple lines continued to decline whilst the orange line started to move sideways and increase.
Well, today we can see that they are all heading upward which shows that Bitcoin has not decoupled from the market just yet. This could mean one of two things;
- Bitcoin is about to tank when the rest of the economy drops again
- Bitcoin might just about survive and either move sideways or increase slightly during this upcoming recession.
Only time will tell what will happen with Bitcoin and we can only hope for the best scenario which is pretty much just seeing Bitcoin traveling sideways between $4,800 and $8,000 whilst this recession starts to develop.
Let us take a look at some technical analysis for Bitcoin and highlight the major areas of support and resistance moving forward.
Bitcoin (BTC) Price Analysis
BTC/USD - MEDIUM TERM - DAILY CHART
What Has Been Going On?
Taking a look at the daily chart above, we can clearly see how the Coronavirus pandemic caused a major market sell-off during March as the cryptocurrency dropped by over 48% when it fell from a high of $9,000 to reach as low as $4,800.
Luckily, after it found support at $4,800 it managed to remain above this level for the next few days. It did briefly spike lower on March 13th as it dropped as low as $3,900, however, the bulls managed to push the market higher to close back above the support at $4,800. The support here is provided by a downside 1.272 Fibonacci Extension level and further bolstered by a 6-month-old descending trend line.
Following the crash, the market started to move sideways for a few days until resistance at $6,000 was broken after about a week of trading. It then went on to trade at resistance at $6,455 for a further 5-days. This resistance is provided by a bearish .382 Fibonacci Retracement level that is measured from the February highs to the March lows.
After breaking the resistance at $6,455 we can see that Bitcoin moved higher into resistance at $6,790 and has been trading here for the past 5-days. It did try to break above $7,000 a few times, however, the market was never able to close above the $6,790 resistance.
Are We Bullish Or Bearish?
From a medium-term perspective, we are bearish. However, in the short term, we are neither bullish or bearish and instead are trading within a neutral trading condition as we move sideways.
We are still pretty far from being bullish. The first sign for a bullish short term trend would be if the market can close above $8,000. Even at that point, we would need to break above the March highs to confirm any form of solid trend.
For a longer-term bearish market to be established we would need to see Bitcoin breaking beneath the support at $4,800. This will be the crucial level for Bitcoin to hold to prevent it from crashing further lower when the next economic market drop comes into play.
From a short term perspective, we would see the breakdown of Bitcoin toward $4,800 if the market closes beneath the $6,000 support.
Where Can We Go From Here?
Well, if the bulls can break the $6,790 resistance, we can expect immediate higher resistance at $7,000. The resistance here is pretty strong and is bolstered by a short term 1.272 Fibonacci Extension level.
Above this, higher resistance lies at $7,225 (bearish .5 Fibonacci Retracement level), $7,570, $7,700 (1.618 Fibonacci Extension level), and $8,000 (bearish .618 Fibonacci Retracement level).
If the buyers can somehow continue to break the resistance at $8,000, we can then expect added resistance at $8,500, $8,000, $9,000, and $9,116 (bearish .786 Fibonacci Retracement level).
On the other side, if the sellers push lower, we can expect the first two levels of support to be located at $6,570 and $6,445. Beneath this, support lies at $6,200 and $6,000.
If the bears break $6,000, support is then located at $5,750, $5,500, $5,200, and $5,139. Beneath $5,000, additional support lies at $4,825 (downside 1.272 Fibonacci Extension level), the previous long term falling trend line, $4,455 (downside 1.414 Fib Extension), $4,227, and $4,000.
What Are The Technical Indicators Showing?
The technical indicators are not very pretty right now. Fair enough, the RSI has managed to break above the 50 level which shows that the previous selling momentum has faded, however, it is pointing downward and is in danger of breaking beneath 50 again.
Additionally, the Stochastic RSI is in extremely overbought territory and is primed for a bearish crossover signal that is likely to send the market much lower!
In conclusion, the cryptocurrency market is in a REALLY tricky situation. On the one hand, it was designed to be recession-resistant as many people once considered Bitcoin to be a safe haven asset such as Gold. However, recent economic twists caused Bitcoin to crash with the wider economy which has almost destroyed the idea that Bitcoin is a safe haven asset.
Nevertheless, the economic recession IS coming and it is only a short matter of time before it is announced. Although this is not financial advice, do not get enticed into buying this apparent ‘market bottom’ as you are in strong danger of entering into the bear trap that could cause some devastating effects to your portfolio.