Bitcoin bounces in style as Wall Street hits new highs

On Tuesday I outlined a bullish case for bitcoin futures whilst prices remained above $60k. One soft US CPI and retail sales report later, I’m pleased to see that bullish range expansion kicked in on Wednesday. And as bitcoin’s performance is now closely tied to stock market indices, it is no coincident that the crypto currency rallied on the day Wall Street and the Dax reached record highs.

Market performance on Wednesday, May 16^th

• S&P 500 1.2%
• Nasdaq 100 1.5%
• Dow Jones 0.9%
• AUD/USD 1.1%
• Gold 1.2%
• Bitcoin futures +7.4%

Ultimately, weaker US data equates to assumption of Fed cuts and therefore ‘easier money’, which in turn boosts appetite for risk. Yet the data cannot come in too soft, as the US needs to achieve lower inflation alongside stable growth for risk to rally on the ‘soft landing scenario’. And as traders are favouring softer US data over strong, it may not take much weakness in today’s second-tier data from the US for markets to extend Wednesday’s moves into the weekend. 

Looking through the calendar, there are plenty of data points and Fed speakers to keep traders on their toes. The ideal scenario for USD bears would be to see jobless claims edge higher whilst industrial production, Philly Fed manufacturing and housing data edge lower. The icing on the cake would be slightly dovish comments from Fed members Harker, Mester or Bostic with a slightly softer GDPnow thrown in for good measure.

But if incoming data allows and sends the US dollar is lower, there is a reasonable chance we could expect an extension of Wednesday’s moves to send indices higher, alongside bitcoin and gold.

However, as noted in this morning's report, the US dollar is near several decent support levels and other key markets like gold and bitcoin are near resistance. In which case, perhaps we may need to be on guard for a retracement on these markets before momentum resumes in Wednesday’s direction.

Bitcoin technical analysis:

The daily chart shows that strong trading volumes accompanied Wednesday’s rally, which marked its best day in two months. The daily high stalled a fraction beneath the high-volume node flagged on Tuesday, so the question now is whether bitcoin has the bullish backing to simply continue higher form current levels.

The 4-hour chart shows that the RSI (2) has reached overbought, and a small bearish pinbar has formed to show bullish momentum is slowing. From here, I’d prefer to see a retracement lower and would consider seeking bullish setups above or around the 200-bar average, near the prior swing high.

The bias is for an eventual breakout above these cycle highs and for it to at least head for 70k, a break above which brings 72k into focus.

Wall street indices:

I have mentioned in previous COT reports that asset managers remained net-long indices, and that their recent flip to net-short exposure VIX futures was another vote of confidence for the stock market in general. Yet as net-long exposure to Dow Jones futures was relatively low, it comes as no surprise to see the index as the laggard of Wall Street’s three main indices; the S&P 500 and Nasdaq 100 made easy work of a new record high whereas the Down Jones barely scraped a close above the previous record high.

Still, the trends are undeniably bullish. And unless we see US data tank at a scary rate, it seems the path of least resistance for US stocks is higher from here. And with the S&P 500 and Nasdaq comfortably clearing their prior record highs, any dips towards their breakout levels are likely to be favoured by bulls for another crack at yet a new high.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge