Bitcoin looks to have bottomed

Key Takeaways

• Tuesday’s churning doesn’t take away from the existing bounce in US Equities, which should have additional upside into early June before any settling.
• Treasury yields look to be turning back higher and a push to new monthly highs is likely.
• Bitcoin looks to be starting a bottoming process and longs recommended.  

The minor pullback to kick off this holiday-shortened week hasn’t done much technical damage to suggest our bounce off the 5/20 lows has run its course.  Rather, this move is ongoing and looks to be taking the path of the first meaningful five-wave rally off the lows since this decline began a few months ago.  What’s important is that any decline hold 3982 on pullbacks, which lies around 4% below current levels.  Furthermore, a push back to weekly highs should occur, which would take SPX up to near 4285-4321 on this first move off the lows.  Seeing QQQ get back above 318 would be reason for further optimism, and it’s seen as important that Large-Cap Technology starts to take the lead to help QQQ outperform on a meaningful move off the lows.

Technical reasons for optimism on US equities

SPX, QQQ, DJIA all closed well up off the lows for the month of May, with DJIA and SPX having closed positive for the month, while NASDAQ finished lower by -2.21%.  This monthly “hammer pattern” (technical candlestick lingo for when prices close well up off the lows for the month after a steep downtrend) is a reason for optimism

Financials, Equal-weighted Technology, and Healthcare all outperformed SPX in the month of May.  This is thought to be an important development as some of the main drivers of SPX in percentage terms are finally starting to show strength

Equal-weighted Technology’s +2.39% for May vs XLK’s -0.68% shows why having a broad-based way of measuring ETF’s is important when eyeing SPX’s highest weighted sectors.  Technology finished better than SPX, but when including the main “FAANG” stocks and eyeing XLK, the returns were much more subdued.

The Treasury yield downturn over last few weeks directly coincided with strength in Equal-weighted Technology.  While this might pause a bit if Yields push higher to test/exceed May highs by a slight amount, it’s expected that Yields should begin a more meaningful downturn into September.

China looks to be furthering its near-term outperformance over US Equities and its Tuesday breakout bodes well for further strength. 

Breadth indicators like “Percentage of SPX issues above their 20-day moving average (m.a.)” jumped to highest levels of the year.  This is encouraging given that trends remain negative.

DeMark indicators which signaled “daily exhaustion” into the bottom of late May, have not yet given the “all-clear” on a weekly basis.  This might not be needed in the short run.

Defensive sectors like Utilities, Staples fell to finish out the month of May on a down note; yet, Staples still outperformed Discretionary last month, and I expect that any further push higher in Equity indices likely does coincide with Defensive sectors underperforming.

Overall, despite markets pushing higher in early to mid-June, it’s important to point out that insufficient evidence of capitulation happened, which traditionally creates a more opportune risk/reward scenario to buy dips at/near the lows.  In this case, there wasn’t really meaningful VIX backwardation, nor equity put/call ratios as high as spring 2020 or 2018. While there was one important high Arms index reading (TRIN), which argued lows might be close, it was primarily the sector strength which started to give some clues that a bottom could be near.  Furthermore, the upward progress late last week gave some technical confirmation which had been lacking.  Bottom line, the risk/reward seems to have shifted from a defensive stance and selling rallies to being long and buying dips.

Breadth indicators jumped sharply off recent lows, and this also looks important

One important development seems to focus on how quickly many stocks launched higher off recent lows. The percentage of SPX issues above their 20-day m.a. finished at the highest levels of the year. The percentage of SPX issues above both 50- and 200-day m.a. remain at low levels, but there was some meaningful pop in recent days in the percentage above 50-day m.a.

One other development worth highlighting is the degree to which stocks hitting new 52-week lows plummeted to the lowest levels since early April.  Both of these readings suggest that the bounce late last week accomplished some technical progress and is worth following.

Treasury yields look to be bottoming & push back to new highs into June FOMC likely

TNX reversed back higher to kick off this holiday-shortened week.  TNX moved back above areas of mid-May lows, a technical development that makes it right to hold off on betting on Treasuries in the near-term.

Hourly TNX charts show yields having pushed back above former swing lows from early May.  This is a bullish technical development that argues the near-term lows in yields likely are in place.  The “corrective” overlapping move lower in rates since early May also suggests that a brief move back to new highs in yields can happen ahead of any larger Treasury rally (yield pullback).

Thus, Tuesday’s lift should carry rates back to test 3.16% up from its current 2.844%.  Above that level has some strong resistance near 3.25% around 2018 peaks.  This would be a level to press long bets in TLT, expecting that yields generally can begin to trend lower into September.  This directly lines up with my cycle composite along with my interpretation of Elliott-wave counts on multiple timeframes.  For a 2-3 week basis, TBT and/or TMV are possible longs for those wishing to play a move back to monthly highs in yields.  Finally, one should hold off on buying dips in TLT until mid-Month at/near the June FOMC meeting.

Bitcoin looks to have bottomed.  However, more upside progress needed to suggest intermediate-term trends have shifted back to bullish.  

Bitcoin has shown some impressive recovery in recent days, and its move back above 30,628 gives some confidence that a technical bottoming process is getting underway.  While it might take some time for intermediate-term trends and momentum to improve, it looks right to position long for rallies up to 34,218 initially.  This marks the first meaningful upside target that also aligns with BTCUSD’s two-month downtrend.  Moreover, the ability to climb back over 35k argues for little to no real resistance until 36834-37416 which marks the 50% retracement of BTC’s high to low range from March to May 2022 and lines up with prior early month lows made in May. 

Until larger downtrends are broken and/or signs of a five-wave Elliott-style advance off the lows takes hold, it will be difficult to project meaningfully higher, and/or have true conviction that May lows can’t be tested.  However, the degree of negative sentiment combined with recent technical progress to multi-week highs following a steep six-month correction suggests that a much better risk/reward opportunity exists now to position long vs a few months ago.  Furthermore, if lows for the year are not already in place, this should come about by mid-June.  

Bottom line, it’s right to be long, expecting higher prices near-term, and some intermediate-term optimism is in place now, which will strengthen on evidence of further technical progress.