Major event warning
- PCE price index 5% actual vs 5.5% expected. Inflation cooled more than expected in Energy prices, while others were within expectations. Core CPE was in line at 4.4%
- ⭑ Chicago PMI 45.1 expected. Last week New York Fed PMI pointed to a lower reading in manufacturing activities throughout America
- ⭑ ISM manufacturing PMI, 48 expected
- ⭑ JOLTs Job Opening numbers
- ⭑ FOMC statement and interest rate decision 2 PM EST
- ⭑⭑⭑ FOMC press conference 2:30 PM EST
- ⭑ Initial jobless claims
- ⭑⭑⭑ Unemployment Rate (Jan)
- ⭑⭑⭑ Non-Farm Payroll. Change in employment vs the previous month
We had a lackluster week in the market as buyers ran out of steam after the 10% move Btc had the week before. Most altcoins followed and pulled back to support consolidating after a remarkable period of sustained strength. Btc pushed higher Sunday but retraced its whole move Monday, differing from the two previous weekend rallies, which were not sold into. The selling is due to the FOMC rate decision and press conference happening on 2/1 EST, which will set the tone for Federal Reserve policy for the rest of the year. I think Powell is not happy with the recent market runup and will reiterate his hawkish position. Prepare for some volatility tomorrow and watch your positions. We recommend waiting until tomorrow to open structured product orders as it might mark a change in trend.
This market is one of the hardest to trade right now, and in talking to many seasoned traders, they have reaffirmed the same. We said last week that lots of data and leading indicators point to the downside and indicate a recession is on the horizon. However, it’s hard to see the factors driving this leg down in asset prices.
Two factors that are unknown but can be the catalyst for further downside.
- Effects of the 2022 rate hikes have a lagging impact on economic growth, so we have to wait for 2H for the truth of the situation. It is extremely hard to predict, but data points to negative growth, which we haven’t seen materialize.
- Inflation stops cooling at the pace we have seen, which opens the door to further action from the Fed. This will cause panic in the markets and lead to another leg down in prices.
We have a busy macro week coming up, with interest rate decisions from the ECB and the Fed. As we have all seen in 2022, FOMC meetings have been a consistent source of market volatility, and we expect the same this time. The rate decision is 99.6% baked in at 25 basis points for the meeting, so we expect there won’t be much reaction. The real volatility will start during Powell’s press conference, so instead, prepare for that at 2:30 PM Est. On the off chance the Fed raises more than 25 basis points, short any crypto immediately.
Deflationary data from the U.S. CPI and PPI have both clearly shown that inflation in the U.S. is in a downtrend. CPI came in at -0.1% MoM while PPI was -0.5% MoM, both below expectations and deflationary. The part of the inflation the Fed couldn’t control, Food and Energy, has come down due to easing supply chain pressures. When looking at Core CPI and PPI, we have a 0.3% and 0.1% increase MoM. Inflation is clearly on a downtrend, but the Fed will focus on Core inflation rather than headline CPI numbers which are decreasing but at a slower pace.
Mortgage rates are coming down due to the 10-year treasury rates declining and better future outlook from the market. An immediate impact can is seen through increases in mortgage applications and refinancings. I assure you the Fed wants to avoid seeing this. The 20% runup in $ARKK and people going out to buy houses is the complete opposite of their tighter financial conditions goal. These factors all point to inflation rebounding if the Fed does not stick to its guns. This supports factor 2 of our bear case scenario, where inflation stops cooling at the pace we have seen, and the Fed reiterates its hawkish position. I could see J.Powell in this press conference saying something in-line with the even as inflation is declining, the fight is far from over, and we don’t want the markets to get ahead of themselves.
BTC: Long-term Bearish, Short-term Neutral
We will keep it short on the technical side this week as not much has changed from last week. See the Day | Swing trade section below if you want trade ideas for tomorrow’s FOMC meeting.
BTC hit a high of approximately $24,000 before sellers stepped in and took it lower on Monday due to fears of Fed hawkish comments. From a technical point of view, we had two failed breakouts at the $23,500 resistance, so prices naturally moved to the bottom of the range at $22,500. If BTC can reclaim $23,500 again and hold above it, we will likely move toward $25,000, the high of BTC’s 2022 trading range. This goes back to the concept that when there is a failed breakout, prices shouldn’t be able to reclaim that level if sellers are in control. So if we reclaim the failed level once again, there is a high probability it will follow through.
If we do break down the $22,500 range low, our first level of support is $21,500, followed by $20,000. These are the areas you want BTC to hold and establish a higher low if you are bullish. If the $20,000 level support does not hold, then we are back into the lower trading range from the FTX collapse. You do not want to see this scenario as it would support the bear case.
The chart below shows the order book size on an exchange. Yellow represents whale-sized limit orders >900 BTC waiting to be filled. Through this, we can see large support at $21,500 down from last week’s $21,700. There is also an increased amount of 100 – 500 BTC-sized limit sell orders above, showing traders are positioned to lighten up positions on any potential moves up.
Structured Products | Medium Yield – Low-Risk
I am not looking to invest in structured products before the FOMC meeting. Volatility tends to increase 2 days before the meeting and from 2:30 PM – 3:00 PM EST, which means high returns. I will invest in Buy-The-Dip products after a clear direction is formed. I will send out thoughts on the Pionex Twitter after the meeting and trade ideas, so keep a watch out for that.
Day / Swing Trading (Manual) | Hands-on Approach
I will take a short trade during the Fed press conference at 2:30 PM EST, except if Powell takes a clear dovish stance which is unlikely. For the reasons listed above, Powell will be hawkish, reminding the market that the Fed is serious in its mission which will cause fear in the market and lowering risk asset prices.
- Initial fake pop during the conference and a reversal to the downside. (Blue)
- Immediate sell-off but bounce and then continue to the downside. (Red)
Scenario 1: I will get short as close as possible to $23,500, the failed break-out level BTC made on Sunday. This gives me a manageable level to determine when my idea is invalidated. If BTC gets over $24,000, I will stop out. However, if prices come back under, I will reenter my position.
1st target: $21,500
2nd target: $20,000
Entry: Close to $23,500
Approximate Risk | Reward: 3:1
Scenario 2: Prices immediately sell-off during the press conference I would look to get short on any bounces toward when prices started to sell-off. My stop level would be the high of day for BTC. This trade gives a worse risk\reward given the chase entry.
1st target: $21,500
2nd target: $20,000
Stop: High of day
Entry: $22,500 – $23,500
Approximate Risk | Reward: 2:1
Risk-averse (Grid Bot) | 1 – 12 months: (Sample Portfolio $1,000)
(This is a sample portfolio. Same % gains on a $1,000 or $100,000 portfolio.)
If you had a short-term view, I would close the grid bot before the FOMC. It could be a turning point in the market, and if prices break $20,000, we will revisit the $15,000.
As these bots are long-term holds for me, I will keep them open and add to my position with the plan outlined last week. If the $19,000 – $20,000 support level holds, I would open a Grid Bot with a $13,000 lower limit and a $28,000 upper limit with 100 grids. I would allocate 20% of my portfolio.
Started on 9/6 $18,800. 10% of portfolio allocation.
Started on 12/29 $16,600. 10% of portfolio allocation.
Hodler (Moon Bot) | 1 – 3 year time frame