We’ll see what happens, but the Nasdaq and Bitcoin are on the verge of giving sell signals. At the same time, some things are now completely breaking away from the stock market and are likely to go up no matter what happens with them. First, though, take a look at the price of Bitcoin.
Bitcoin had an epic run from the start of October when it was $10,000 “a coin” up until it briefly went above $63,000 last week. That run has attracted countless people to open up new trading account apps on their phone for the first time to get on board and others to jump into crypto related stocks to try to play the gain. At the same time, crypto promoters have been giving wild predictions for future price gain targets.
However, as I have said over and over again, crypto is not a safe haven asset that acts as a buffer again inflation. What it functions as is an instrument of speculation that is most closely correlated to the Nasdaq 100. When it goes up Bitcoin soars and when it corrects Bitcoin and other crypto coins crash.
Now it appears that Bitcoin has peaked out and it has support at $50,000. It dumped 7% yesterday and is now close to breaking that key psychological point. If it does don’t be shocked if crypto speculators go through hell in the next few weeks. Watch this level, because if Bitcoin goes below it then we will have a giant warning sign on the Nasdaq. My target for Bicoin would be its 200-day moving average at $35,000.
In February, when crypto had a pullback after hitting $57,000 the Nasdaq also fell a bit over 11% into March. However, that pullback caused a lot of popular fad stocks to fall two to three times as much. The ARKK ETF that is made up of many of them fell 29%. Stocks that lag on rallies dump on mere market pullbacks.
Right now the S&P 500 and DOW are extremely overbought. The RSI on the S&P 500 went above 70 last week. However, the Nasdaq is lagging both of those averages. In March, when the Nasdsaq fell over 11% the S&P 500 didn’t even drop 4%. We are still seeing a “great rotation” in the markets out of last year’s fad winners and into new things. If we do indeed get a sell signal on the Nasdaq that process is going to speed up.
It’s also important to note that the stock market tends to rally into each quarterly earnings season and then have a short-term pullback once you get halfway through it as traders and robots do the old buy the rumor sell the news game that they play. We’re now approaching that time. Most stocks that have reported earnings have sold them so far. Most banks stocks did this last week and yesterday we saw it happen with Chipotle, which gapped up on earnings and ended the day down 2%, and several airline stocks too.
And if that trend isn’t enough, yesterday news was leaked that Joe Biden is planning to phase out the capital gains tax for those who earn over a million a year. That would jam up the taxes on the wealthy who own stocks, and would likely cause them to sell before their taxes go up. We’re talking about taxes on stocks sales going up from 20% for them to over 39%. Some would act too by selling now to save themselves money. What would be hit the most? Most likely the stocks that have the highest valuations and more questionable trades for people that are not investments. Think TSLA and crypto virtual coins and “the whales” that own most of them.
So, what do we need to see a sell signal for the Nasdaq?
The daily stochastics on the Nasdaq went above 80 last week to give an overbought technical reading and closed below 80 yesterday to give one sell signal.
We need to see the Nasdaq close below recent support to complete it.
Current support on the Nasdaq is now at $13750. If it closes below that level then we’ll have a compete sell signal. My initial price target would be a dip to its 150-day moving average at $12640.
Such a drop would not be the end of the world.
However, fad tech stocks that dumped hard in February and then barely bounced in March and April would be prone to a wave of heavy selling on any pullback in the Nasdsaq.
I think this is a good time to take some money off the table and to sell things such as lagging fad stocks on the Robinhood top 100 most owned list to raise a cash position and/or use the money elsewhere. One thing to avoid is the ARKK ETF and the stocks inside of it as it is now badly lagging the S&P 500.
One thing that is happening is that commodities are taking off. At the end of March corn had a day in which it went limit up in the futures market. This means it went up so fast that they had to halt trading in it. The same thing happened with the price of corn again yesterday.
CORN is soaring. I don’t own it, but I still continue to hold a core investment position in the DBA agriculture ETF, which also is now outperforming the S&P 500 and breaking away from it. Diversifying outside of the Nasdaq and into commodities I believe is going to be a winning play not just for a few weeks, but for the years to come.
On Thursday, I posted a video I did talking about Jesse Livermore and some things we can learn from the classic 100 year old trading book about him yesterday. While crypto speculators hurt themselves believing in the hype we use core old fashioned principles to navigate these markets that have stood the test of time.
So, I’ll be watching these levels on Bitcoin and the Nasdaq today and next week to see if they get taken out. If they do look for a correction in both to play out. That doesn’t mean the stock market is going to crash, but it does mean that the great rotation is real and is going to continue to play out. Remember gold and Bitcoin have two completely different functions. When the Nasdaq simply has a correction Bitcoin tends to crash. Unlike virtual coins commodities like corn are used in the real world. You can’t even hold a virtual coin in your hand, much less put one in your mouth and eat it. All people do is buy them and look at the prices fluctuate on their phone and dream when they go up and cry when they crash. That is the true purpose of crypto. It serves as a slot machine for people.
-Mike
