As noted in earlier alerts cryptocurrencies are the nearest thing in investing to a pure speculation, which makes them perfect for chartists. The chart above shows that the price of ether has broken down from an area of sideways trading and is in free fall. The second red line in the fan of lines is the neckline of a head and shoulders pattern, which has a good track record of heralding important declines. There is no support above $200 and no telling how far ether might fall except that it looks vulnerable. Whatever the forces that were driving it higher they don’t seem to be working any more and rising interest rates are an obvious negative for an investment that offers zero income and which many people have borrowed to buy.
The other question is the extent to which what is happening to ether and to bitcoin, with a similar chart, has a message about the stock market. Put another way, as long as the cryptocurrencies look so vulnerable should we be cautious about shares in general. I don’t know the answer to that one but it does offer further grounds for caution.
It also raises the question of what does causes bear markets to end. Two things could be required. First the forces driving the bear market need to ameliorate, which in this case means the rising trend in inflation and interest rates. There is no particular sign that that is happening. Everything you read about food, energy, rents and other essentials suggests that there is still strong upward pressure on the cost of living .
The other thing that helps bear markets to end is recession. This has a double benefit. First it is a major influence helping inflationary pressures to cool and bringing down interest rates. Secondly, it leads to companies reporting worse trading performance which is paradoxically bullish because this sets a level from which they can start to improve.
Again it seems too early for this to be happening.
Strategy
Looking at the charts brings me back to my point about not shooting until you see the whites of their eyes. I think we will know when the next bull market begins and I also think when it does we will know which shares to buy to take advantage of it. It comes back to my belief that if it is not obvious it is not happening. My buy signals, when we have them will be obvious and that will be the time to strike and start building positions, adding to existing positions at lower levels and all the other strategies that can help us make money in a rising market.
What is equally obvious is that we are not at that point yet with all my indicators painting a negative picture of a stock market that is trying to find a level which may be significantly below where it is currently.
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