The Bear Case
Market technicals suggest near term caution, while secular trends remain intact
“The future is always uncertain, it is only the extent of our self-deception that changes over time.” –Dylan Grice
Summary:
Technical weakness across asset classes suggests caution is warranted
I observe clues in bitcoin, NASDAQ, and precious metals
Near term downside risks present buying opportunities for well positioned investors
[seven minute read]
Introduction
Where will the market be in one month? In six months? In one year?
I don’t know.
Investing is complex. Markets are dynamic input-output machines that represent the continuous intersection of supply and demand, factors which are themselves influenced by a nearly infinite number of variables.
For help, let’s turn to Bayesian theorem.
Bayesian refers to a way of reasoning about probability that updates beliefs as new evidence comes in.
Said more simply, Bayesian thinking relies on evidence-weighted probabilities over hard conclusions.
Rather than allow market uncertainty to frustrate us, let’s use it to our advantage.
My objective is two-fold:
To accept that the future cannot be known
To maximize returns in the widest number of scenarios
I am a long-term investor, not a market timer. It feels odd to open my research portal with a cautious note, but the evidence suggests the bear case is worth considering.
Technical Analysis
I’m a student of classical charting, a form of technical analysis that respects basic chart patterns. The core idea is that prices trend, and certain patterns offer clues about the behavior of buyers and sellers at key price levels.
Technical analysis is one of several tools I use. I never rely on it in isolation, but it can be helpful for positioning… especially when charts confirm or refute clues found elsewhere.
Technical analysis is particularly helpful at market turning points.
With this backdrop, let’s examine the charts of bitcoin, NASDAQ, and precious metals.
Bitcoin (BTC)
Classical charting warns against the use of diagonal lines. Horizontal lines are far more reliable as they represent key areas of support or resistance at consistent price levels.
Investors have strong memories around where they previously bought and sold positions. If you’ve ever lost money on an investment, you may recall the feeling of wanting to get out whole. More on this later.
Diagonal lines don’t offer consistent price levels. With diagonal lines, key areas of support and resistance can vary widely. Far less useful.
Where diagonal lines can be useful, however, is signaling the potential for a change in trend. Even better if multiple patterns confirm the same signal.
During the 2020-2021 bull market, bitcoin topped in November 2021 and declined 77% over the following year. By January 2023, the BTC chart was offering clues of a potential change in trend.
The trendline established by the bear market top in 2021 and dead cat bounce in March 2022 (green line in the chart below) was broken in January 2023 (green circle).
For further confirmation, bitcoin completed a multi-month bottoming pattern around this same time known in classical charting as an inverse head & shoulders. Resistance turned into support at the black line and bitcoin returned 814% over the preceding three years.
Today, we have what appears to be the exact same pattern, inverted.
The current bull market has followed the red trendline below that began with the 2022 low.
Last week, we violated that trendline (red circle):
For further confirmation, one week prior, BTC completed a head and shoulders top (black line). That top suggests an initial price target of $71,500.
How low might bitcoin ultimately go and what is the catalyst?
I will explore both questions in a subsequent post.
In the meantime, BTC is deeply oversold, and I expect a bounce back up towards the psychologically significant $100k level.
Here’s what that scenario might look like:
Other widely followed digital assets confirm the bearish view.
Solana has formed a head & shoulders top… hopefully recognizable by now.
Ripple, a leader earlier in the bull market, has formed the same.
Let’s take a look at bear market clues in the equity market.
NASDAQ
Leading indicators offer the ability to position for trend changes early.
Since the release of ChatGPT in late 2022, tech equities have been the clear leaders. Since the initial GPT 3.5 model release, the tech-heavy NASDAQ 100 has returned nearly 155%.
Today, however, we can observe a concerning pattern in NASDAQ that may signal trend reversal: the broadening top or megaphone (black lines).
To make matters worse, the blow-off top in late October can be considered an overthrow or out of pattern move (red circle below). With the blowoff top reversing quickly back into the broadening top pattern this month, I am taking notice.
Silver
Admittedly, silver is one of the most exciting long term charts I have ever seen.
I’m long silver in size, and I’m hesitant to fade it here.
Silver first challenged the $50/oz. price level in 1980 following a near decade long bull market catalyzed by the U.S. unlinking the dollar from gold in 1971.
Around this time, the Hunt brothers famously attempted to corner the silver market. In 1979, the final year of the bull market, silver rose 800% in a single year.
Regulators and exchanges eventually stepped in, imposing position limits.
Three months later, silver declined from nearly $50/oz. to $11/oz.
It would take over three decades for silver to reclaim the $50/oz. price level.
In 2001, China opened its markets to the world and joined the World Trade Organization. This set off a decade long bull market in commodities and precious metals. Ten years later, in 2011, silver was once again challenging the $50/oz. price level… but it wouldn’t hold.
It’s hard to imagine the market had a price memory spanning over three decades, but the chart suggests that it did. Congrats to the 1980 top buyers who eventually got out whole… three decades later.
Today, we are once again challenging the $50/oz price level.
Will it hold?
I have no idea.
Longer term, the pattern is a textbook example of a cup & handle… a reliable ascending pattern that suggests silver may nearly double in price from these levels.
Shorter term, let’s zoom in and look at the daily price chart.
How is silver behaving around the $50/oz multi-decade price resistance (red line)?
Here I observe another rare but reliable pattern in classical charting, the double top.
After nearly five decades of resistance, it makes sense that silver would hesitate and perhaps correct at the psychologically significant $50/oz. price level.
Conclusion
What do bitcoin, tech equities, and silver have in common?
They are all risk-on assets sensitive to global liquidity. I will address liquidity in a subsequent post.
To be clear, I’m a long-term investor with a bias to bet with, and not against, markets.
I believe bitcoin, tech equities, and precious metals are all in multi-year secular bull markets.
That said, that doesn’t make me bullish all the time.
In the short term, I am tactically bearish.
If silver makes convincing new highs or any of the patterns previously discussed are invalidated, I will quickly reconsider my view.
How am I positioned?
The majority of my portfolio is still long bitcoin, tech equities, and precious metals.
However, I am holding a higher than average cash position.
To be clear, I would prefer to be wrong on my tactical view.
My portfolio would benefit more if I’m wrong.
My positioning reflects a heads I win, tails I win scenario… at least psychologically and over different time horizons:
If weakness persists, I will add to long term holdings at attractive prices
If markets have already bottomed and continue higher from here, I will preserve cash for another well priced opportunity down the road
There’s always another trade.