Blocksmith Says: Look to S&P Index Futures to Understand BTC Action

25 May 2022

I thought we would look further a field than Bitcoin today to see if there is an instrument that tracks it well, but for which we can do a separate technical analysis. 

Doing a read across like this often helps clarify what may seem muddy in the main ticker of interest. To find a suitable index, I ran a correlation study of multiple indices from the start of 2022 to find out what matched up most closely. It was the ES1 Index for the S&P500 Index futures contract. The correlation is +0.86, which means the two series match very closely.

There are a few interesting things to consider in the ES1 chart. The main takeaway is that the price action within the down channel has a zig-zag down look to it. There is a big bounce midway (Y) which drives right up into the price range of the first leg down (X). This choppy structure strongly implies that there is a longer, unseen uptrend in force, and that price is working its way across this in a correction. 

In other words, if the January move down is a correction, then it is going the opposite way to the main trend, which is therefore up. Typically, corrections form three distinct waves. I think there is a case to be made for the current low price structure to be the final (Z) wave. This means the whole thing could have just ended and we are due a rebound of some sort. This, by implication, should drive crypto higher.

Note also that price is at the bottom of the channel and that we are building a bullish divergence in RSI.  This was covered in the first RSI teaching notes and highlights a big slow down in price, a necessary precondition for the end of a decline. We also just had our first moving average crossover to the upside.

Read more: Blocksmith Explains Relative Strength Index (RSI)

Blockhead Team
Newsletter graphic

Info Blocks In Your Inbox.

If you want relevant updates occasionally, sign up for the private newsletter. Your email is never shared.

Subscribe to our newsletter