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What Comes After $35,000 Bitcoins?

By Joe Duarte on December 11, 2017

Bitcoin is a money magnet and the stock market may be suffering from the neglect of buyers flocking into the cryptocurrency.

Despite the best efforts of what those who might have been considered rational thinkers in the past, yours truly included, we are still in a bull market for stocks. Of course we can all argue about the reasons for higher stock prices and what the future may hold. But at the end of the day, the inevitable crash just hasn’t materialized, at least not as of this writing. Yet as uncanny as the current bull market in stocks has been, we are now entering into something completely different in the realm of uncharted territory. Of course, I am referring to the entrance of Bitcoin into the “legitimate” universe of real markets, as the cryptocurrency starts trading in the futures markets.

I’m not going to get into the pros and cons of Bitcoin. It’s here, and it will do whatever it ends up doing no matter what I think. And when Bitcoin and the other cryptocurrencies fulfill their eventual destinies, there will be repercussions. That said, I think we can all agree on one thing; Bitcoin is attracting a great deal of attention, and money.

As the chart of the New York Stock Exchange Bitcoin index (NYXBT) shows, the price of Bitcoin has gone nearly parabolic – nearly straight up- as money has poured in, especially over the last few weeks. Now so much money has flowed into Bitcoin that the price closed outside of the upper 20 day Bollinger Band on December 8. Usually, this is a signal that prices have gone too far in the current direction and that a correction is likely in the not too distant future. But I get the feeling the trap isn’t quite ready to spring yet. With the advent of futures trading on Bitcoin I would expect the price to rise even further in a very short period of time - $35,000 by the end of the month – anyone?

Indeed, we may still be in the early innings of the the cryptocurrency mania. Things, believe it or not, just aren’t crazy enough at the moment. For example, a week before the tech stocks broke down recently; a friend of mine pulled me over to thank me for recommending tech stocks to him over the summer. I sold my tech stocks a while back and I told him he might wish to lighten up on his. But he was just giddy and smiled at me shaking his head. – Oh Joe, you don’t understand. I haven’t heard from his since. Maybe I’ll ask him about Bitcoin. I will report on it here, of course.

Anyway when an asset class attracts as much attention and money as Bitcoin is currently doing, it usually means that there is less focus on other investment opportunities. Furthermore, history shows that it is often those areas that are overlooked during periods such as the current Bitcoin moment, that are the ones that deliver meaningful profits, often with less risk. Thus, as Bitcoin sucks up all the air in the proverbial room, I’ve found an underappreciated area of the market which offers opportunity with less risk. I’ll tell you about it below.

Uptrend Remains Intact for Now

Believe it or not, Bitcoin is not the only way to make money in the universe. For one, the stock market has had a pretty good year. Paid subscribers recently banked 150% profit on a call option in a few days. And it’s not a smart move to argue with the one stock market indicator that has been correct for the past 13 months, the New York Stock Exchange Advance-Decline line (NYAD). Again this past week NYAD made a marginal new high, suggesting the odds are still favoring higher stock prices.

As usual, it’s not a perfect picture. For example, this week the ROC is not very robust, suggesting momentum is not quite as strong as it could be. And the RSI is sort of stuck in no man’s land. If these indicators don’t improve, we may see yet another swoon in NYAD, which may give us yet another opportunity to buy on a dip. For now the line itself is still in a bullish posture. So the bulls get the benefit of the doubt.

Big Stocks Losing Followers

So while the NYAD is still bullish enough, there is a bit of a shadow developing in the big stock indexes. Right now, it’s difficult to know whether money is just not going into the large cap stocks or if it’s tricking out. No matter the reason, one thing is clear; the rate of advance in the big stocks is slowing. Even at a casual glance, you can see that the S & P 500 (SPX) and the Nasdaq 100 (NDX) indexes are a bit off their games. While SPX is near an all time high, NDX is well off a potential new high. Furthermore, NDX is still in a lower high and lower low price pattern.

Consider the Accumulation Distribution line (ADI) and On Balance Volume Indicator (OBV) on SPX – both are well off their best levels, with OBV actually being in a short term down trend. That suggests sellers are gaining the upper hand. On the other hand, OBV and ADI are fair on NDX, but ROC, which measures momentum is below the zero line; suggesting upside momentum is weak at best. Perhaps the most bothersome aspect of both major index charts is the falling volume both on rising and falling days. This last piece of information is important because when volume starts to contract, it’s usually an indication of a potential liquidity problem.

When you put the weakness in OBV, ADI, and ROC, as applicable to SPX and NDX individually, a picture of a potentially vulnerable market emerges.

Stealth Bull Market in Construction and Materials

As I stated above, the large capitalization stocks in SPX and NDX seem vulnerable. Yet, there are some specific areas of the market which are currently exhibiting some relative strength. Indeed it is often in December when a new market sector starts to make its move out of the pack. And right now, it looks as if that area of the market, which may become an early favorite in 2018, is construction and materials.

A review of the Dow Jones U.S. Construction Index (DJUSCN) shows a bullish chart pattern where this sector has rallied off of its August and September bottom and is starting to build a base above the highs achieved on the bounce from the late summer rally. The 700 area seems to be an area of good support, so as long as prices remain above this key chart point, the bullish case remains intact. I have recommended four construction and material stocks to my paid subscriber list over the past week and there are others which soon may make it to the active buy list.

December Promises to be Significant

The price charts suggest money is flowing out of tech and into Bitcoin as well as building and construction stocks. Moreover, the length of the bull market in stocks, combined with the political climate and the emerging patterns of money flows, suggest we are close to some type of meaningful shift in the market. I’m not sure if this means a crash in the stock market is just ahead or if we are merely getting close to a rotation away from technology into more tangible investments such as building materials and construction. For now, I will take my chances on brick and mortar – the construction stocks rather than code/Bitcoin. That is, of course, until a liquid way to use options on Bitcoin that is not in the futures market materializes.



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