Bitcoin’s Major Topping Pattern Is Now Complete

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Two months ago, I saw a euphoric climax in bitcoin, which I didn’t like (see “Could This Be a Double Top in Bitcoin?”). The futures ETF had just launched, and they were running those commercials starring Matt Damon on CNBC for Crypto.com invoking Fortuna, the Roman Goddess of luck. They are still running those ads, but the price has fallen by $30,000 from its peak.

This, as they say, is where the plot thickens.

Bitcoin

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Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Bitcoin is showing a completed head and shoulders top with a neckline at $40,000 and a head at $69,000. Typically, a “head and shoulder top” declines the distance between the head and the neckline, which would be $11,000 in our case. The problem is that the latest head and shoulders top is actually the second peak of a monster double top, which gets completed on a decline below $28,000. If $28,000 gets violated as support, which I think it will, chances are we will see bitcoin trade under $10,000 in 2022.

Bitcoin

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Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I have pointed out Bitcoin’s correlation with the ARK Innovation ETF (ARKK), which promotes fast-growing business with extreme valuation multiples. The problem is that ARKK can be cut by over half, as it has been, with businesses that are still fast growing with a lot of potential, but they are still expensive!

I think ARKK is probably ripe to have a dead-cat bounce this week, as the biggest single-day advances typically happen in the context of a bear market, which both ARKK and bitcoin are clearly in. I believe it is premature to talk about a bear market when it comes to the broad stock market, as the economy is likely to improve in 2022 after the Omicron wave ends. I think the stock market is panicking due to Fed uncertainty, and it is entirely possible that the Fed won’t be as aggressive as the stock market fears, if inflation subsides in the latter part of 2022 because of fewer effects after the loosening of bottlenecks.

The S&P 500 is Now the Most “Oversold” Since the March 2020 Bottom

The Relative Strength Index (RSI), a popular oversold/overbought oscillator, spends most of its time between 30 (oversold) and 70 (overbought). It closed on Friday at 26.91. It has not seen a lower reading since late March 2020. Needless to say, some kind of rebound is likely for stocks this week.

S&P Large Cap Index

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Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Furthermore, we just closed below the popular 200-day moving average for the first time since June 2020. Based on history and experience, I can tell you that the first kiss of a rising 200-day moving average after long periods spent above it, this is likely a buying opportunity. That does not mean that the low produced on this decline is the ultimate low for 2022, but it does mean that a significant rebound is likely.

I am looking for an intermediate-term rally this week, and I believe that the only person that can override this rather positive setup is Jerome Powell – as happened in 2018, when the first marginal close below the 200-day moving average came in late March. After that, we had a choppy month or two but a significant rebound and a new high into September. In the fourth quarter, Jerome Powell tightened monetary policy too much and the S&P 500 fell well below its 200-day moving average, after a whole year of rate hikes and balance sheet shrinkage. Still, the first kiss of the 200-day moving average was a buying opportunity in 2018, and I think it will be a buying opportunity now. Below is what happened to the S&P 500 in 2018.

S&P Large Cap Index – 2018

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Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The most likely bottoming pattern we’re seeing is some kind of rebound off the 200-day moving average, a kiss of the 10-day moving average and then some kind of a retest of the low.

I seriously doubt the stock market will keep going lower, as it has for the first three weeks of 2022.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

Disclaimer: Please click here for important disclosures located in the “About” section of the Navellier & Associates profile that accompany this article.

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