Bitcoin is at risk of plunging towards $9,000 on a negative outlook for the S&P 500 index.Wall Street firm BTIG LLC has warned that the U.S. benchmark could correct towards the lower end of its current trading range.The downside move in the index could lead investors to offset their losses by selling Bitcoin and other profiting assets.
Bitcoin plunged in early Wednesday trading after failing to secure a strong foothold above $9,700 earlier this week.
The benchmark cryptocurrency was trading 1.15 percent lower at circa $9,512 as of 1017 UTC. The move downhill came as a part of a corrective pullback from $9,792-resistance, established on Monday. Traders perceived the price top as their cue to exit their bullish positions for small profits.
Bitcoin price chart on TradingView.com showing its downside correction from its weekly high near $9,800. Source: TradingView.com
The bearish correction, meanwhile, is looking to extend itself further. Part of the reason is Bitcoin’s volatility, which has fallen to its eight-month low, according to readings from Bollinger Bands. Also, the daily trade volume on BTC/USD charts looks meager enough to validate an upside continuation.
More Losses Ahead
Bitcoin’s uncanny positive correlation with the S&P 500 also points towards further losses.
Ahead of the Wednesday open, futures tied to the U.S. benchmark index edged lower by 0.87 percent. The downside sentiment appeared as investors assessed concerning signals from the economy, including a resurgence in virus infections in parts of the U.S., Europe, and China.
Julian Emanuel, the chief equity and derivatives strategist at New York-based investment firm BTIG LCC, noted that the S&P 500 could fall further in the coming session.
The veteran said in a note to investors that the U.S. benchmark’s growing disconnect with its fellow American index, the Nasdaq Composite, could lead it lower towards the lower end of its trading range.
The Nasdaq reached a record high on Tuesday, leaving the S&P 500, as well as the Dow Jones behind.
A rise in VIX, which represents volatility, could cause a massive downside correction in the S&P 500 market. Source: Bloomberg
Meanwhile, Mr. Emanuel also noted that if the Cboe Volatility Index (VIX) moves above 45, it would lead the index towards its June 15 low at 2,965.
In the previous instances, VIX levels between 25 and 45 have resulted in broader declines in the S&P 500.
The CFA Institute, a group that comprises of veteran global investment management professionals, also reported that only 10 percent of their 13,300 members see a V-shaped recovery.
Many found the current stock market rally divorced by the economic reality, driven merely by a vast policy response from central banks and governments.
“You have a separation between the real economy and markets right now and you are hoping it doesn’t get too big before a correction takes place,” Olivier Fines, the author of the CFA report, told FT. “At some point markets will have to have something to do with the real economy.”
Red Signals for Bitcoin
A crash in the S&P 500 could drive Bitcoin lower alongside. Traders looking to cover their margin calls would sell the most profitable asset of their portfolio first to seek cash liquidity. That may lead the bitcoin, one of the best-performing assets of 2020, down.
The next cryptocurrency plunge could be more significant, but technical analysts find $8,600-9,000 a safe downside target.
I’d prefer not to see a revisit to below $9k otherwise we could see a drop close to $8600.
Otherwise, I’m seeing positive signs and leaning more towards a relief bounce early on today up towards $9300 area.
— NebraskanGooner📈 (@nebraskangooner) June 15, 2020
On a brighter note, the market now has better cash liquidity than it had during the March 2020 crash. It may also assist in limiting Bitcoin’s downside bias to a certain extent, making the cryptocurrency as a safe-haven like Gold against a falling S&P 500 market.