The stock market is looking heavier than usual, after a drastic climb to frequent and furious all-time highs due to unprecedented stimulus money and extraordinarily low interest rates. What this could mean is that the stock market’s use as a vehicle for the excess glut of money out there no longer makes sense, especially as valuations have outpaced company performances.
Most major indices continue to make new highs, but have lacked any momentum for significant upside. When this occurs, often extended bearish sentiment is necessary to build the stage for a short squeeze, or a reset in the stock market will play out.
The last selloff in the market was so severe, that it caused a panic unlike has been seen since the Great Recession. But the next one could be even worse, and market participants know this and this in turn increases risk significantly.
All About Stocks
The stock market is where investors, traders, speculators, and even brokers all come together for a world of profits and losses, supply and demand, and much more.
Individual companies “go public” on the stock market and offer company shares as securities to investors, board members, and for other purposes. A certain allocation goes to employees, especially founders and key executives as company equity.
Shares are then offered on the stock market for buyers and or sellers to take advantage of whatever the current market price is at the time. As more shares are sold, prices fall due to more supply than demand. As more shares are bought, prices rise due to demand outpacing supply.
Stock Indices Explained
Index trading involves trading weighted baskets of stocks versus individual stocks themselves. The most popular stock indices today include the Dow Jones Industrial Average, the S&P 500, the Nasdaq, and many more.
The S&P 500, for example, is a basket of the largest US-based companies trading on the stock market. Rather than investing in just one company’s shares, investors can diversify and reduce risk by putting money behind an index instead.
Stock indices are highly regarded as some of the more safe investments, however, even major stock indices can take a huge hit when bear markets arrive. Throughout history, however, the stock market has produced more reliable gains than anything else. As economic activity rises and the companies included in the index grow, so does the value of the index and the investor’s returns.
The Risk Hanging Over Stocks Today
The problem with stocks today, is the fact that company earnings are not keeping pace with the outrageously high valuations across the stock market. There is no denying that there is a speculative bubble brewing, with IPOs and SPACs appearing left and right. But bubbles can inflate a lot larger than most would expect and markets can stay exuberant for extended periods.
Amplifying this issue, is the fact that stimulus money had flooded markets all throughout 2020 and early 2021. This pushed valuations even higher beyond reality, and a crash back down to reality might be coming.
Technical Signals Turn Bearish
The stock market doesn’t always conform to normal technical standards like forex or crypto. Chart patterns are much less clear, but there’s always some movement around things like news cycles that can be somewhat predictable.
But most major stock indices are exhibiting an extremely bearish pattern, and one that played out in Bitcoin only a few months ago. The result was a more than 60% collapse from all-time highs, and it might have ended the bull market in its tracks.
Currently Bitcoin is trying to regain its footing, but the stock market could fall to the same fate. Much like how the stock market took down Bitcoin and the rest of crypto on Black Thursday, another massive crash in the stock market could be even more deadly for cryptocurrencies.
The bearish pattern in question is called Three Pushes To A High and it can be found using the Bollinger Bands.
Three Pushes To A High
The pattern itself was forewarned by the creator of the Bollinger Bands himself, John Bollinger. Weeks after the call was made, sure enough, Bitcoin (pictured on the right) collapsed. On the left, is the Nasdaq, which is exhibiting the same Three Pushes To A High Pattern.
If a lower high forms on the Nasdaq, a much deeper drop could follow. Shorting the Nasdaq is possible using CFDs such as those offered on PrimeXBT. A short could be profitable if the pattern is valid. The Bollinger Bands are just one of many of the technical analysis indicators available to PrimeXBT users.
Individual tech stocks such as Tesla took a large hit this week, and it could be the start of the dominoes falling on the stock market, especially around the over-extended tech sector.
Why A Stock Market Crash Could Benefit Crypto
The days ahead are especially critical in the stock market as the global economy goes through a period of turmoil and change. The stock market could be due for a couple-decade bear market for the first time in nearly 100 years, and it could lead to a massive capital outflow into commodities, metals, and possibly cryptocurrencies. All while this happens, the dollar itself is beginning to struggle and hold up the world’s debt and outrageous valuations.
The dollar itself could go digital and follow in the footsteps of the likes of Bitcoin. Stocks could end up tokenized and traded via Ethereum on decentralized exchanges. Banks as we know them could no longer exist. The future of finance is going to look nothing like it does today, but it will be built on the changes that are taking place today.
A crash in the stock market could be a changing of the guard in terms of assets, and lead to a new crypto economy that doesn’t in the end fall victim to the same destructive fate. All eyes will be on the Nasdaq and other major US stock indices in the days ahead to see if the pattern confirms and the stock market experiences a great reset.