To The Moon

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In my previous newsletter titled Leaders, Triggers and Volatility, I talked about the possibility of a market drawdown and volatility spiking in a historically bearish window. However, this does not necessarily have to happen immediately. Topping is a process.

The most reliable indicator of a market top has been a bearish divergence forming on the daily SPY chart. This indicator has been reliable since 2008, preceding all major drawdowns:

Here, we can clearly see the 2 bearish divergences that preceded the 2022 bear market and the 2024 Liberation Day correction.

We can see more instances of corrections only after a daily bearish divergence formed above - the 2018 correction and the 2020 COVID crash.

And lastly, the one that started it all - the daily bearish divergence formed in 2007 prior to the Global Financial Crisis.

A quick look at the first chart shows that no significant bearish divergence has formed on the daily. This means every dip will continue to be bought up until SPY, minimally, forms a new ATH during cash hours. Not to mention, the JPM collar sits at around 648 on SPY (6,500 on SPX).

In my TACO post, I talked about the Zweig Breadth Thrust as well. If SPY manages the average return of 23.78% post-ZBT, it should be able to hit 664.

Volatility (VIX) has continued to remain suppressed, with a breakdown of the 16.63 daily support level being a key trigger for a squeeze on the indices:

VIX only has support around the 14.25 daily imbalance - 14.78 support level. That daily imbalance has remained unfilled for over half a year, and a fill of that level is likely to result in a sharp bounce for VIX, provided the black support trendline and the red descending channel holds. If this 14.25 level breaks properly without a “squat” (false breakdown), then expect the upside move to be even quicker below this level. For the time being, bears have defended this level well but when a dam breaks, the bulls come flooding in.

Another development that further supports the possibility of further upside in equities is Ethereum (ETH) breaking out of its long-term resistance trendline. As I’ve mentioned in my previous newsletters, cryptocurrencies tend to front run equities. This is especially true in recent years following the approval of cryptocurrency ETFs by the SEC, which has brought a new wave of equity investors into the cryptocurrency markets.

ETH has consolidated in a pennant for almost 4 years, forming a series of lower highs and higher lows… until this week. This week, ETH broke out above the sticky resistance level at 3,843 and is now headed back towards its prior ATHs at 4,867. It’s also on the verge of a bullish stochastic crossover on the monthly.

Based on historical price action, a breakout has normally preceded a 1-2 year bull market for ETH. Based on Fibonacci extensions, this breakout could potentially take ETH to somewhere between 12,000 and 17,000 by 2027.

This breakout has coincided with substantial institutional accumulation of ETH in prior years and in recent months leading to the breakout.

ETH treasury companies such as BitMine Immersion (BMNR, ~ 800k ETH) and Sharplink Gaming (SBET, ~ 500k ETH) have also been gaining traction in recent months, as the 2 largest treasury companies.

BMNR formed a bullish imbalance on the monthly chart at 30.60 in July and has been compressing inside a falling wedge for the past few weeks. This 30.60 level held firmly at the start of the month, before BMNR broke out of its wedge alongside a RCYC red candle. It’s now headed back towards the daily imbalance at 59-110.84. As ETH continues to push towards its prior ATHs, BMNR is likely to follow suit.

For SBET, it is clearly lagging BMNR both in terms of total ETH holdings and price action. SBET has been trying to break above this resistance trendline (in red) for the past 2 sessions. Depending on how you draw the trendline, it has either closed just below / just over it. However, the appearance of the RCYC red candle, the bullish stochastic crossover, and the continued appreciation of ETH over the weekend is likely to result in a move above 27 in the next week or so, which would definitively confirm the breakout.

Unlike ETH, Bitcoin (BTC) has been rather tame recently. In my previous newsletter, I posited that BTC could be positioning for downside. However, subsequent price action suggested that it could merely be consolidating for higher. The reason in the change in tone is because BTC continues to retest prior supply levels without breaking below them:

Here, we can see that BTC has failed to break below prior resistance, while consolidating in a descending channel pattern. The trigger for further upside is the 117,811 level. Once that level is breached, it increases the likelihood of a sustained upside move towards the 120,505-121,357 daily imbalance.

Moreover, a quick look at BTC’s daily stochastic oscillator suggests that it has almost been fully reset. Thus, it’s difficult to be bearish given the supportive structure in Cryptocurrencies.

Stay nimble, and stay alert. Valuations continue to appear frosty in equities, but recent price action suggests further upside for the time being.

$BitMine Immersion Technologies Inc.(BMNR)$ $SharpLink Gaming(SBET)$ $iShares Bitcoin Trust ETF(IBIT)$ $iShares Ethereum Trust ETF(ETHA)$ $SPDR S&P 500 ETF Trust(SPY)$ $Cboe Volatility Index(VIX)$

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