Market Overview: March 6 2023
Bull trap seems to be losing momentum. What happens next?
2023 started off with equities rallying and a more optimistic narrative for inflation and interest rate hikes. Although the markets are expecting a soft landing scenario, I think this is quite unlikely due to sticky inflation and the yield curve inversion of the bonds market. The cracks are showing and a trend reversal is on the horizon. Here are some things to look at…
VIX:
The Cboe Volatility Index (VIX) is real-time index that represents the market’s expectations for price changes of the S&P 500 Index (SPX). It generates a 30-day forward projection of volatility. Volatility, is often seen as a way to evaluate market sentiment, and in particular the degree of fear among market participants.
Investors use the VIX to measure the level of risk, fear, or stress in the market. Hence it is widely known as the “Fear Index.” The higher the VIX, the greater the level of fear and uncertainty, with levels above 30 indicating tremendous uncertainty and being often associated with a bear market.
When the VIX is low, risk-on assets tend to perform well — such as crypto — since fear in the markets is low. A low volatility environment = a “safer”, less uncertain market and participants are more inclined to take riskier bets. On the contrary, when the VIX is high, risk-on assets tend to crash since fear in the markets is high and participants are less willing to take risksy bets. A high volatility market = a more risk averse market.
Currently the VIX is trading at 18. When the VIX trades in the weekly lower range — between 18 & 16 — it tends to indicate that it is bottoming and there could be a potential bounce back from this level. Therefore, it is a good indication for taking profits due to a potential trend reversal.
EQUITIES:
S&P 500:
The S&P 500 is looking bearish. It has broken down from the monthly highs at 4080 and is trending downwards towards a key support zone at 3940–3860. There was been very low volatility and not a lot of price action lately. There has been a slow gradual bleed out over the past couple of weeks to that key level of support at 3985. Price trading at this level of support can give equities some sort of reaction. As seen this week, price entered that support zone and price quickly bounced back up a bit but keeps trending downwards.
NASDAQ:
NASDAQ rejected the previously monthly high at 12890 and price got slapped back all the way to the previous range. Therefore, we can expect the price to be trading around this range 12206 & 10615 in the next weeks.
There is no real volatility in the markets right now. However, the equities market can be impacted by the Fed’s decision on interest rate hikes and price action can be data driven. We need to wait and see whether the next hike remain at 25 bps or 50bps. I am more inclined to see the Fed do a 25 bps and keep gradually rising interest over the course of 2023, rather than doing an aggressive hike. If we take a look at the 5 year breakeven inflation rate it has gone up around 50 bps through last month. This is a clear sign that rates will go higher for longer.
The Fed keeps addressing a “soft landing narrative” which clearly is not the case. Also, the bond market is telling us that rates willl continue to trade higher. US 1 year bonds are trading over 5%, foreshadowing where the Fed funds rate will be in the future. This means that there is still room for another 50-100 bps hike. Inflation is not going down any time soon by the looks of it and it is becoming a worldwide problem, not only in America but also inflation data in the EU came out really high at 8.6%.
The scenario of the overall markets is not looking good and it looks even worse for risk-on assets such as crypto.
BTC:
There was a small rally at the beginning of the year but price did not do a major breakout. Price traded to a key resistance level at 25k and immediately came back down.
BTC price is still contained into the weekly range. We have not seen price do a major breakout above last weeks highs. So I am more inclined to the idea that the price will continue to go down. If we breakdown below the weekly lows and the monthly open, that indicates that the market will keep going down. If there is a breakdown of this level we can see a sell off back to the 21k-20k level. Plus there is a CME gap at 19.9k that has been there for several weeks now.
12 EMA & 21 EMAs on daily:
The 12 EMA & 21EMA crossed to the downside, indicating the start of a bearish trend.
Bearish Divergence:
In addition, Market Cipher — a proprietary indicator based on MACD — also indicates there is a bearish divergence on a weekly time frame. This suggests that we might be on the last dump of this bear market.
Potential Scenario:
As I mentioned before in previous posts, I think that we are heading back down for that last dump in price before we see a consolidation phase and a bull run. Here is a potential scenario that I can see playing out based on the 2017 bull run price levels. Price might retrace to 21–20k and pump again, however, if price breaks down from the support level at 16.5k, I could see new lows in the next months around 12k–11k.
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