- Bitcoin is under risk of continuing its bearish correction as the S&P 500’s trading range indicates a drop.
- The U.S. benchmark is trading between its 50-day and 200-day moving averages, a metric that typically leads the market lower.
- The correlation between Bitcoin and the S&P 500 has grown stronger since their March 2020 sell-off.
A bearish fractal in the S&P 500 that historically leads the index lower may prove equally fatal to Bitcoin.
The U.S. benchmark is trading between its 50-day moving average and 200-day moving average since April 6, 2020. Moreover, the index is nearly 50 points lower than the 200-DMA, a metric that forecast changes in the direction of the trend. That leaves the S&P 500 with adequate room for a correction.
At least two veterans agree with the bearish forecast about the index.
One of them is Jason Goepfert, an analyst at Sundial Capital Research, who says there is a 72 percent chance of S&P 500 breaking low. In a statement to Barron, Mr. Goepfert cited 30 instances from the past wherein the U.S. index was trading between the 50-200 DMA, with a majority resulting in average downside corrections of 12.7 percent in the next six months.
“Buyers haven’t shown enough oomph to make any progress lately,” he said. “When that happens during down trending markets like we’ve been in, with a protracted stretch near but below the 200-day average, it has indicated larger problems and that has almost always meant further weakness ahead.”
The other analyst is James McCormick, a macro analyst at NatWest Markets. The market veteran wrote in a report that if the S&P 500 breaches above its 200-DMA, it reflects changes in positioning by commodity-trader advisers, predicting that there is going to be a “big short” in the U.S. stocks.
Bitcoin a Collateral Damage
The bearish predictions for the S&P 500 come at a time when its positive correlation with Bitcoin has surged higher against a global health pandemic. Researchers at the University of Sussex Business School found that their trends’ proximity grew stronger in March 2020, rising to 63 percent.
Later in May, the correlation dropped to near 40 percent, which looked unsettling for Bitcoin, an asset that remained entirely uncorrelated to most of the traditional assets in its 11-year lifetime.
Moreover, Bitcoin is undergoing a bearish correction after failing to break above $10,000, a crucial resistance level, on more than seven occasions in May. The move downhill has stretched its downside targets to lower $8,000s, around its 200-day moving average.
If the S&P 500 plunges against long positions, it would lead the battered investors to dump their holdings elsewhere to cover their margin positions. The same had happened during the March 2020’s global market rout, where even Gold, a traditional safe-haven, plunged alongside the U.S. stocks.
That leaves Bitcoin under similar risks.