The Market Breakdown is back, baby!
The Market Breakdown is back, baby!
Talking FOMC, stock indexes, Bitcoin, Ethereum, and more!
I have been busy with some new projects at the TWC Trading Academy but we are back now! The Market Breakdown newsletter will be hitting your inbox weekly once more and not a minute too soon as the stock indexes are hitting new ATHs, Bitcoin is trying to find its footing to confirm that the low is in, and Ethereum sentiment is at the one of the worst levels I have ever seen! Are you ready?
Be sure to watch the latest episode of my Friday Market Breakdown…
…and my weekly podcast Beards and Bitcoin airing on Wednesdays at 11 a.m. CST as Andrew and Tillman join me each week to discuss Bitcoin price, news, miners, and institutional insights.
Fed Rate Cut Expectations: Turning Point or Trap?
With the FOMC meeting this week, the market is pricing in a possible rate cut of either 25 or 50 bps.
A rate cut would be a significant departure from the Federal Reserve's previously hawkish stance. While such a rate cut may indicate that the Fed is ready to cushion an cooling economy, there is more to this than meets the eye.
Why the Market Expects a Cut
Several factors fuel these expectations, but recent economic data shows easing inflationary pressures. Headline inflation is improving, core inflation is rising at a slower pace, while even the traditionally strong labor market has shown signs of softening: the pace of wage growth has slowed, job openings have fallen, and the din of chatter about the possibility of a recession-or at least deeper slowdown-is getting louder. Geopolitical tension, together with broad-based financial tightening and likely softer global demand, has contributed to uncertainty and increased the probability of the Fed shifting to a more accommodative policy stance. These signs are interpreted by the market as dovish for a Fed pivot, which continues to fuel consensus expectations for a possible rate cut this week.
Arguments for a 25 bps Cut
A 25 bps cut highlights cautiousness of the Fed toward slowing economic momentum but without over-committing to a drastic policy change. This is in line with the usual strategy of the Fed for incremental moves that allow adjustments based on future data.
A more modest Fed cut would signal its intention to support while saving ammunition in case there is persistence of inflation or other economic surprises.
This would help markets feel that the Fed pays heed to the economy, while the central bank is by no means easing fully. It would stabilize equities, boost bonds a little, and result in measured reactions in the currency markets.
Implications of a 50 bps Cut
A 50 bps cut however would signal that the Fed was increasingly concerned about the economy; a signal, that it is ready to take bold action to prevent a downturn, likely boosting equity markets initially by reducing capital costs and providing a boost to liquidity but ultimately seeing equities drop lower outside of the short-term knee jerk reaction.
This large of a cut may be seen as indicating that the Fed expects larger economic problems. The perception could shift from "the Fed is helping us" to "what does the Fed know that we don't?" In such a case, panic or a sell-off could be triggered because investors would feel the economy is much worse than perceived.
It will have more complex implications for the bond market: yields could head lower, but if inflation risks are seen to rise then the long end could steepen. The dollar may also weaken further against major currencies in the event of a rate cut if other central banks do not follow suit.
Market Reactions: Short Gains, Long Risks
A rate cut could well ignite risk-on sentiment, higher equities on the view of easier conditions. Bond yields may fall, particularly at the short end. Currencies may be mixed; a softer dollar could support emerging markets and commodities. Traders and investors are warned to be ultra-cautious. A rate cut will not guarantee smooth sailing in the future. The move may give a transient boost to sentiment, but it won't cure the basic economic problems. If the Fed cuts rates at rising or slowing down growth or inflation, the market will quickly give its gains back.
The Fed's Dilemma: What's Next
The Fed needs to tread a fine balance. A rate cut this week-whether by 25 or 50 bps is going to be a signal of intent, but tone and guidance are crucial. The central bank needs to make it amply clear that any rate cut is for supporting growth and inflation risks. Traders and investors would want to remain agile while refraining from over-committing to any narrative. Markets are bound to be very sensitive to this monetary policy change. While the rate cut may encourage risk, the economic context brings forth a call for caution. Effective risk management and greater awareness of the macroeconomic landscape will be crucial in fighting one's way through future volatility.
Stock Indexes
The stock indexes have continued to rally through the summer. The DJI was the first to print a new ATH completing wave ((i)). Wave ((ii)) appears to be complete since price has rallied beyond the wave (b) extreme. That gives us a local target of 43281 and a wave ((iii)) minimum expected target of 45270.50.
We can see the same basic structure in the SPY which completed wave ((i)) just shy of the ATH. We have a local target of 602 and wave ((iii)) appears to be in progress toward a minimum expected target of 634.50.
The Nasdaq is the laggard here as the NDX has broken out above it’s larger degree wave ((b)) extreme but wave ((i)) terminated much shorter to the ATH. However, wave ((iii)) is likely in progress toward a minimum expected target of 22853.50. Breaking out above the wave (b) extreme at 19622.73 will add confidence to that count.
So, while the doom and gloomers are out there making a lot of noise, as they have done for the past 2+ years promising you a market crash, stocks seem poised to continue their rally higher. This isn’t to say that a market crash can’t happen, but until we see real signs in the charts we should follow the old trader’s advice of trading in the direction of the trend. And that direction is still up.
You can subscribe to my weekly newsletter the Bitcoin Miner Stocks Report where you will get the week’s information and news regarding this sector, commentary, and most importantly updated charts of 15+ public bitcoin mining companies. Subscribers have been able to jump in on some big moves as they were well-positioned before the stocks popped. And as of late they’ve been able to wait for their entry as the miners have corrected more recently. The next issue will go out Monday evening.
*If you are one of the few TWC lifetime members this subscription is included in your membership, so send me a quick DM to make sure I get you subscribed.
Bitcoin ETF Flows
After an amazing launch the Bitcoin ETFs have suffered a bit toward the end of last month and into the beginning of this month. Friday showed great inflows of 263.2M though. We will see if this week can see follow through with continued strong inflows.
These more recent outflows shouldn’t be a surprise to anyone however as Bitcoin, itself, has been effectively sideways in a ~$20K range for seven months now.
Bitcoin
Price rallied 15.5% since the September 6th swing low before pulling back today toward the blue daily pivot.
A break out above the wave ((B)) extreme at 61202 on the Bitcoin All Time Index chart will signal that wave ii is likely complete and that wave iii is in progress toward a minimum expected target of 82478. The larger degree wave ((v)) has a target of 93654 based on the height of wave ((iv)).
If this cycle is to end like every cycle before, then we should expect wave ((v)) to overextend much higher. Based on previous cycles, we should also not expect it to end until Q4 of 2025. However, there’s a lot of things that need to happen in the meantime to make that a reality so we will continue to trade the chart as it prints rather than tell it what it needs to do.
TWC Traders Club - Get your first 3 months for ONLY $50!
In celebration of TexasWest Capital’s 7th anniversary, we are launching the TWC Traders Club on Tuesday! Get access to the exact cryptocurrency and futures trades me, Brian “FiboSwanny” Swan, and Andrew Bennett are taking throughout the week. Also get access to my R.I.S.K. framework workshop recording, daily market analysis, live event access to discussions of trader and market psychology, and more! Check out TWC Traders Club for more info and then join us! If you already have an account on our platform please use this link instead of the one on the website. You will be credited the two free months after your join. But be sure you join ASAP because this offer is only valid through Tuesday!
Ethereum ETF Flows
Sentiment for Ethereum is at one of the lowest levels that I have ever seen. The Ethereum ETFs flows have been battered since the launch with the continued significant outflows from Grayscale’s ETHE product.
I have to admit that Ethereum is taking a bigger beating than I initially thought it would. But it is usually at these extremes of sentiment that price reverses. So traders should be paying attention if they want to catch a long-awaited rally.
Ethereum
Looking at the ETH/USDT weekly chart, Stoch RSI is bottomed out in oversold and RSI has almost reset into oversold.
Price is sitting just a bit above the weekly pivot at this time after pulling back 50%. It looks like price is printing a diagonal with wave ((iii)) terminating at the cycle high of 4093.88 and wave ((iv)) possibly being complete at 2116.02. Breaking down below that low will keep wave ((iv)) alive with an initial target of the weekly pivot at 1970 or secondary target of 1787.
Breaking out above 2597 will be the first clue that wave ((iv)) may be complete. Wave ((v)) has an expected target of 6160 based on the current height of wave ((iv)).
Gold Futures (GC1!)
This weekly chart shows us that gold continues to break out higher and print new ATHs. However, it looks like the current wave may be nearing completion. Wave ((iii)) has a minimum expected target of 2741.90 and wave v of (v) looks like it may be completing an ending diagonal. Breaking down below wave iv at 2502.70 will indicate that wave v is likely complete. Further breakdown below the wave (iv) extreme at 2351.90 will confirm it.
The US Dollar Index (DXY)
The DXY was rejected at the weekly R1 pivot and then fell through the channel support. This led to continued decline into the local swing low at 100.617 where the DXY bounced locally. Unable to rally through the daily pivot, the DXY bounced at the swing low once more and was rejected at the daily pivot again. As it nears the swing low yet again, it looks ready to fall through which will give us a target of the next swing low at 99.589.
The human side of every person is the greatest enemy of the average investor or speculator.
— Jesse Livermore
Chart of the Week
The XDC/USDT chart is breaking out locally and may be in the process of confirming a large double bottom.
The double bottom is far from confirmed at this time. Breaking out above 0.09450 will confirm it and give us a pattern target of 0.44940. The rally into 0.09450 appears to have completed wave ((i)). Breaking out above the wave (x) extreme at 0.06586 will add confidence to the count and give us a minimum expected wave ((iii)) target of 0.26030. Wave ((v)) would then align with the pattern target previously mentioned.
Locally, wave iii is in progress with a minimum expected target of 0.03770 or secondary target of 0.04180. Breaking down below wave ii at 0.02411 instead will invalidate that count.
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DISCLAIMER: This newsletter is intended solely for educational purposes and should not be construed as financial advice. It does not constitute an investment recommendation or a solicitation to buy or sell any assets. Please exercise due diligence and conduct your own research before making any financial decisions.
The Market Breakdown newsletter does not operate as a registered investment advisor. This document is provided purely for informational purposes and does not constitute an offer or invitation to buy or sell any financial instruments. The viewpoints expressed are derived from historical data analysis and are deemed reliable, though their accuracy is not assured. Readers are entirely accountable for any decisions made based on this information.
CFTC RULE 4.41 - These results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under-or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown.