November 27 REX Wire Market Outlook

Risk assets soar, but bitcoin is heavily overbought - what's next as the cycle progresses?

Will the lower dollar push risk assets even higher?

As the new week kicks off, we take our regular overview, aiming for a high-level picture of what the different TradFi and crypto markets are doing.

Dollar Weakens

With the Fed making mildly positive noises about inflation, traders are reassured there will be no more interest rates rises in this cycle. As we've seen in recent weeks, the dollar has weakened, and that move lower has now been confirmed with a break below support at 105. The next major support is 103, which lines up with the old high in March 2020, back when markets were crashing due to COVID, and the dollar was the safe haven asset of choice.

We're keeping a close eye on what happens next. A bounce from 103 might be expected, but equally, if momentum is with the dollar bears, then the move might continue to the next major support at 101.

The weaker dollar, of course, has huge implications for risk assets.

Risk Surges

The S&P is enjoying an exceptional rally from its recent lows, just one month ago.

S&P chart, TradingView
The S&P 500 is closing in on its all-time highs.

It's now just 5% off its all-time high. The NASDAQ is closer still. Japan's Nikkei recently made an all-time high for the first time in over 30 years.

Gold is comfortably above $2,000. Meanwhile, yields on 10-year Treasuries, a key risk-off asset, have dipped 10% from their recent highs just below 5%, 5 weeks ago.

10-year bond yields, YCharts
Yields on 10-year Treasuries have fallen 10%

China is one major economy that is not enjoying the fruits of a weaker dollar. Its economy has been struggling, since failing to exit its COVID-induced recession with a bang, as analysts hoped. Most recently, one of its huge shadow banks, Zhongzhi Enterprise Group, is being investigated for illegal activity following losses totaling tens of billions of dollars.

Bitcoin Booms

The stars continue to align for bitcoin. As anticipation surrounding the approval of a spot ETF grows, and the weaker dollar provides a tailwind, BTC has made new local highs. On Friday it pushed as high as $38,400, and once again held $37,000 to close the week.

BTC is now heavily overbought on the weekly timeframe, with the RSI reading 75. However, in bull runs, it can remain in the overbought zone for months. In the first run-up of the last bull market, BTC broke 70 on the weekly RSI back in October 2020, around the $13,000 mark. RSI hit almost 95 in early January 2021, when BTC closed the week at $38,000. It then remained in the overbought zone for another three months. Such was the force of that initial move that the all-time high of $69,000 did not even register as overbought: Momentum was falling right through 2021.

Needless to say, the past doesn't always repeat itself exactly. However, we can note that:

  • Bitcoin can remain overbought on the weekly RSI for long periods of time.
  • Topping out on the RSI does not necessarily indicate the peak of the bull run.

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