Sideways Day in the Equity Markets
SPY gapped up and filled its overhead gap from Tuesday before selling off. Essentially, SPY retested the retest gap. Now we see whether we continue moving in the direction of Tuesday’s gap, lower, or if the bulls can take out Wednesday’s high and get back to grinding higher. If we continue lower, there is a major support zone at $761 to $758 on SPY. As long as that zone holds, I view this as nothing more than a small correction after a very solid impulse move, and I would expect that dip to be buyable.
SPY Daily Chart
If we instead push higher and take out Wednesday’s high, I can use Tuesday’s low as a pivot for managing risk and tentatively assume the bulls are back in control. For now, there is nothing on the chart that makes me want to get overly bearish. We had a strong move higher, and the market is simply working through a short-term pullback. The key is whether those big support levels hold.
QQQ is showing a slightly different picture. Both SPY and QQQ gapped higher on Wednesday, but QQQ sold off harder, made a new low for the week, and then bounced almost perfectly off its 50-day SMA. This setup looks very similar to what we saw on July 24 and July 27. In that instance, we saw another two days of downside before the market found its footing and began a sustained rally higher.
If we see another leg lower, I will be watching closely for a similar response at the key support levels on both SPY and QQQ. On the other hand, if QQQ can gap higher and reclaim the opens from Tuesday and Wednesday, around $721, I will be looking for follow-through similar to what we saw on March 31 and July 30. That would be a much more bullish signal and would suggest the buyers are ready to step back in.
QQQ Daily Chart
Treasury Injects Liquidity
The Treasury announced that it will significantly increase its buybacks of longer-term government debt. Starting September 9, the Treasury will increase the size of its buyback operations in the 10-to-20-year and 20-to-30-year parts of the bond market from $2 billion to at least $4 billion per operation.
This may sound a lot like quantitative easing, but there is an important distinction. The Treasury is buying back some of its older bonds using cash it already has. The Federal Reserve is not creating new money or expanding its balance sheet, so this is not QE or “money printing” in the traditional sense. What it does do is create additional demand for longer-term Treasury bonds, which can help push bond prices higher and yields lower.
And that is exactly what we saw.
Yields Fell, the Dollar Dropped, and Bitcoin Popped
The 30-year Treasury yield dropped from 5.285% to 5.21% after recently reaching 5.337%, its highest level since 2007. The 10-year yield also fell from 4.71% to 4.66%. At the same time, the dollar had a pretty bearish day, with DXY dropping about 0.8% to 98.86.
DXY Daily Chart
That combination is bullish for risk assets. Lower yields tend to be supportive of stocks and other risk assets, while a weaker dollar generally helps assets priced in dollars, including Bitcoin and gold. The weakness in the dollar also confirms the failed breakout we saw in June and July. If DXY continues to chop sideways or move lower, that would be a favorable backdrop for risk assets.
After spending roughly seven weeks stuck in a range, traders had built up a pretty large short position. When BTC started moving higher, those shorts were forced to buy back their positions, accelerating the bullish move. Roughly $1.9 billion in leveraged positions were liquidated on Wednesdays long day bull candle. Now we need to see if it can close above the 200-day SMA, which will be the first sign that maybe this time there is something different.
BTCUSD Daily Chart
Gold saw a similar move, jumping 2.7% to around $4,528 per ounce, its highest level since early June. We had falling yields, a weaker dollar, a large amount of short positioning, and renewed concerns around government debt and inflation all hitting at the same time. When you get that many factors lining up in the same direction, markets can move very quickly.
Gold Daily Chart
Not QE
I do think it is important not to confuse the Treasury buybacks with another round of QE. The Treasury is using money it already has to buy bonds, while the Fed is not creating new bank reserves or expanding its balance sheet. The liquidity impact is therefore much smaller than what we would see from an actual Fed balance sheet expansion.
The program is also temporary. The current plan runs through the Treasury’s refunding quarter, which ends November 4. At that point, we will get another look at whether these larger buybacks will continue. If Treasury demand helps push yields lower but yields start climbing again after the program ends, some of the recent tailwind for Bitcoin, gold, and other risk assets could fade.
For now, though, the setup is pretty straightforward. Lower yields, a weaker dollar, and a crowded short position created a pretty powerful combination for BTC and gold on Wednesday. The bigger question is whether this is the beginning of a sustained move higher or simply another short-term burst after a long period of consolidation. From here, I will be watching the key closes to help answer that question. The first major level I am watching is the 200-day SMA on both gold and Bitcoin.