Crypto, Stocks, Dollar: Who Sinks; Who Swims?

January 3, 2019 / by Bill Noble

It would seem everybody in crypto these days is a macro strategist. We are proud to say that 2019 is our second full year looking at crypto as a part of a macro framework.

In 2018, we caught the top in stocks in September and October, but it was a very empty victory. Big players used CME bitcoin futures to hedge losing equities positions. Bitcoin lost half its value, and the idea of Bitcoin as a safe haven suffered potentially permanent damage.

2018 has created a strong motivation to nail down the big turns this year to the fine details.

Charts of ETFs for the Nasdaq 100 (QQQ) and Dow Jones Industrial Average (DIA) have turned very distinct and ugly. There is a traditional double top formation on the DIA chart. DIA has also made a confirmed break of major support that goes back to February(Figure 1). The technical downside target for DIA is 200. The target implies DIA could fall up to 12 percent (Figure 1).

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QQQ is in the same boat. QQQ has a head and shoulders top. There is a confirmed break of the neckline, and QQQ is putting pressure on major support from back in February (Figure 2). The technical downside target for tech stocks implies a 13 percent drop.

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Looking at these charts, it seems like a 10 percent flash crash may be in the immediate future for stocks. One reason for this flash crash could be the VIX index of stock market fear may have already peaked (Figure 3).

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VIX hit its top Bollinger Band and major Fib speed resistance line and has actually dropped during January. This may be a sign that big players have given up hedging with options and have moved into a mode where they outright sell stocks. If everybody sells at once, a flash event could unfold where equities experience a bidless drop that could unfold over a one day period.

Looking beyond the charts, a 10 percent drop in equities likely brings in some kind of government intervention to stop the decline. The simplest form of government intervention is a signal that the Fed is done raising rates. One step up from that is if the Fed actually lowers interest rates.

The next level is a government-sanctioned devaluation of the U.S. dollar. Historically, a lower dollar has created a distinct boost for equities. Also, a lower U.S. dollar can help the U.S. win the trade war. If the dollar falls in value, U.S. goods elsewhere become cheaper, potentially offsetting the impact of tariffs.

The dollar drop is in full swing. The dollar vs. the yen (USDJPY) has already unwound all of last year’s gains with a flash crash (Figure 4). And, it’s not just the dollar that has been flash crashing. There have been big down moves in the euro and the pound that have made headlines.  

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How will all this impact crypto? We see three scenarios:

  1. Stocks drag down all risk assets, including crypto.The dollar-yen flash crash is the first of many. This could bring Bitcoin (BTC) to unspeakably low levels. Imagine Bitcoin (BTC) going down so hard, you can’t buy it. As soon as you buy crypto, the coin has lost 30 percent in value by the time your order is filled. This continues until Chinese New Year in early February.
  2. Bitcoin holds as risk assets flash crash. A dip to $3,500 or $3,330 is possible. Stocks crash, the dollar crashes. Crypto holds on a relative basis.
  3. Too many people are bearish on equities. Everybody sees the same charts of DIA and QQQ, and stocks go the other way and rally. Donald Trump, like him or not, told everybody to “Buy the Dip.” That could mean the U.S. views a disorderly drop in equities as a threat to national security. If equities somehow hold up, it could be the dollar that declines on political turmoil and expectations of lower interest rates. In that scenario, Bitcoin rips higher in a short squeeze for the ages.

Bottom Line: Right now, there is no way to tell how crypto would react to a black swan event in equities or other legacy markets. We do know this: When Bitcoin (BTC) was above $10,000 last year, if we told you that fiat currencies were flash crashing, people would have been wildly bullish crypto. It’s amazing with Bitcoin (BTC) below $4,000 that it’s hard to convince people that a legacy/fiat/dollar event brings a massive amount of capital to digital assets sooner rather than later.