The lingering correlation between Bitcoin and the S&P 500 may be soon coming back to haunt the cryptocurrency market if a chillingly accurate sell signal sends the major US stock index tumbling back towards Black Thursday lows.
Could the correlation cause the same for the first-ever cryptocurrency?
Bitcoin’s Continued Correlation With the S&P 500 Could Lead to Repeat of Black Thursday
Prior to the historic Black Thursday collapse, the S&P 500 and many major stock indexes set a record for a new all-time. Before the quarter ended, however, a record was set for the worst quarterly close in stock market history.
At the same time that the S&P 500 was tapping highs, Bitcoin was trading at above $10,000 – a key level said to be the remaining resistance between current levels and a retest of the asset’s all-time high set back in 2017.
During that time, Bitcoin price reached $20,000, then later fell to as low as $3,200.
Related Reading | Strong Correlation Between Bitcoin and Stock Market May Finally Be Over
The Black Thursday collapse that crushed the S&P 500 also sent Bitcoin tumbling from $10,000 back to under $4,000. There was no escaping the liquidity crisis as the investment community realized a recession was more than likely as a result of the pandemic.
Since then, a strong correlation has remained between the S&P 500 and Bitcoin. The major US stock index and the leading cryptocurrency by market cap both have made a sharp, V-shaped recovery – a sign that often indicates a bottom is in.
Is The Recovery In These Two Markets Sustainable With Stimulus?
Fears of a false bottom are mounting, however, and an accurate sell signal triggering on the S&P 500 may cause another retest of Black Thursday lows, or worse. And due to the correlation that Bitcoin continues to share with the index, any downside in the stock market could spill into the cryptocurrency yet again.
Economic stimulus packages have kept stock valuations high, and stimulus checks have provided investors with additional funds they don’t mind risking on crypto assets like Bitcoin.
Related Reading | New COVID-19 Lockdown Proposal Poses Unique Threat to Bitcoin’s Ongoing Momentum
While all of this has helped the S&P 500 and Bitcoin’s recovery from lows, it may not be enough to keep markets afloat for the long term. Uncertainty surrounding any economic reopening plans are leaving investors skeptical about returns, and fears of inflation are causing investors to rethink their holdings.
This could benefit Bitcoin as the asset becomes more looked at as a hedge against inflation like gold, but for now, the cryptocurrency remains more correlated to stocks than the precious metal market.
In the chart above, however, it is clear that Bitcoin goes through periods where it is correlated with the S&P 500, and other times when it is not. After spending a few weeks now anticorrelated against the stock index, the correlation appears to be returning and it could spell disaster for the first-ever crypto asset.
Making matters worse, the TD Sequential indicator has issued a 9 sell signal on the S&P 500. This incredibly accurate signal has worked well in crypto markets, but was designed by traditional market timing wizard Thomas Demark.
If the setup confirms, and the S&P 500 dumps, BTC could be in trouble.