Bitcoin (BTC), Nasdaq 100 (QQQ), and VIX: P&L Destruction

January 10, 2019 / by Bill Noble

With Bitcoin’s (BTC) decline today coupled with the slow rally in stocks, it is a reminder that markets frequently move in ways that hurt the most people.

Coming into 2019, the consensus was that tech stocks (QQQ) and equities as a whole could drop 25 percent. That decline could create a recession later in the year and into 2020. The other consensus idea was that the Christmas bottom in Bitcoin (BTC) meant risk-reward favored being long crypto.

These things may still come to pass, but right now, Mr. Market is putting a world of hurt on anybody who traded these ideas.

Let’s begin with equities.

QQQ and other U.S. stocks market index ETFs had a really bearish technical picture. The ominous head and shoulders top in QQQ was the prime example (Figure 1).  Looking at the current situation, tax loss selling in stocks and mass hyperbole about a rollover in the economy may have led people to be “dug-in” on the bearish view on both stocks and junk bonds.

As bears dug in, the charts started to turn. QQQ broke back above the neckline of the head and shoulders top, potentially invalidating the pattern (Figure 1). The likely catalyst for the recent up move is numerous conciliatory statements by the Fed. The statements implied it was not going to crush the market and the economy with rate hikes.

Figure 1

As QQQ rallied, the VIX volatility, or “fear” index, failed at a Fibonacci speed line and fell back below its top Bollinger Band (BB). Fear in equities was fading even as people became more and more negative. In the past, VIX moving above its top BB and the close back below the top BB has historically triggered buy signals in equities (Figure 2).

 class= Figure 2

The developments on the VIX and QQQ charts seemed to add some fuel to the rally in equities. The slow grinding nature of the QQQ rally is likely excruciating for bears as they watch P&L erode at a snail’s pace.

They say the equity market “climbs a wall of worry,” and that is playing out as of now.  Stocks may still get hit very hard, but it may be even harder to stay with this idea.

Meanwhile, back on the crypto ranch, Bitcoin (BTC) “chartist pain” is the mirror of what happened in QQQ. In Bitcoin (BTC), there was a decent chart set up for an attack of major resistance at $4,250 or a big Gann point at $4,500.

As it may turn out, the late December up move in Bitcoin to $4,100 may have been nothing more than a squeeze of futures players who went short Bitcoin futures at the recent expiration. With shorts out, negative developments like a possible sudden drop in the Bitcoin (BTC) cost of production, as well as negative news from the South China Morning Post hinting on Bitmain, may have had a sudden negative impact. The Bitmain news could create fear that the company may have to liquidate crypto positions.

Looking at the chart of Bitcoin (BTC) on Bitmex (XBTUSD), we see that a false breakout above diagonal resistance and from a diamond formation may have fueled the severity of the down move. The false breakout from the diamond right at the apex of the formation is particularly brutal (Figure 3).

 class= Figure 3

Bottom Line: Financial market have entered a vicious P&L destruction environment. Consensus ideas have not been profitable. For Bitcoin (BTC), XBTUSD on Bitmex may move back to $3,756 to retest an important Fib speed resistance line. If XBTUSD can get above that, Bitcoin (BTC) can stabilize and even rally. If Bitcoin (BTC) on Bitmex fails at that level, the decline may not stop until a Gann time inflection point at Chinese New Year near February 4.  Dip buying is tempting. The crypto Twitterverse is absurdly bearish at the moment. That impulse is tempered by the fact that the break from the peg near $6,500 in Bitcoin started with a 10 percent decline that came out of nowhere.

The Crypto.IQ Trading Desk is now hard at work coming up with analysis and ideas to profit from both a potential counter-trend bounce in Bitcoin and possibly setting up for a broader decline. While big traders may be suffering from inflexible views, the Crypto.IQ Trading Desk has remained nimble and produced good results being both long and short in this environment.

Join me there as we test the scenario analysis above with real-world ideas.