Market Overview
Long-term, the stock market remains in a bullish trend. However, over the past several months, the market has moved sideways, with price action becoming increasingly choppy.
In this update, I focus on the consolidation in the Nasdaq 100 ETF (QQQ) and then look beneath the surface at key risk-on industry groups, namely semiconductors and Bitcoin. These areas often provide early clues about market direction. Together, these charts help frame what to watch next as the market approaches a potential inflection point.
QQQ Consolidation and Key Levels to Watch
This chart shows QQQ over the past six months and highlights the consolidation that has been underway since early October. I have marked this entire area with a light blue box labeled “Chop / Consolidation.” While the longer-term trend of the market remains up, price action over the past three months has been largely sideways, indicating a pause rather than a clear directional move.
At the top of this consolidation, I have noted the high made in late October. A decisive move above this level would be very bullish and would suggest that the market is ready to resume its longer-term advance. This would be especially constructive if it occurs alongside strength in risk-on areas such as semiconductors and Bitcoin, which I will discuss in the following charts.
On the downside, I have marked two important support levels. The first is the higher-low made in December. A move below this level would be short-term bearish, as it would negate the higher low that typically defines an uptrend. That type of move would likely lead to continued choppy trading, as long as price remains above the lower boundary of the consolidation.
The most important downside level is the low made in late November, which represents the bottom of the consolidation. A decisive break below this level would be intermediate-term bearish. It would shift the structure from consolidation into something that resembles a topping pattern and would place the index into a defined downtrend.
In summary, this chart indicates a market that remains in a longer-term uptrend but is currently consolidating. A breakout above the top of the range would be a strong bullish signal, while a breakdown below the key support levels would suggest growing weakness. The next directional move out of this consolidation will be important in determining where the market goes next.
Semiconductors Continue to Confirm a Risk-On Environment
This chart shows the S&P 500 index in the top panel over the past two years, with the relative strength of semiconductors (SOXX) versus Consumer Staples (XLP) in the lower panel. The purpose of this chart is to see what an important risk-on area of the market is signaling beneath the surface.
In the top panel, I have marked the February high from last year with a red vertical line. That peak was followed by a sharp market decline that lasted until the April low, which is marked with a green vertical line. Leading into that February peak, the relative strength of semiconductors was already weakening. In the lower panel, this is shown by a red declining trend line, where SOXX underperformed XLP for roughly seven months before the market topping. This negative divergence was an early warning sign that risk appetite was fading.
At the April low, the picture changed. I have marked this with a green line in the relative strength panel, showing that semiconductors began to outperform again. That shift back to leadership confirmed a return to a risk-on environment and provided confidence that the market trend had turned higher.
Today, semiconductor relative strength remains in an uptrend, and there is no negative divergence present. This continued leadership suggests that investors are still willing to take risk, which supports the view that the current consolidation is more likely to resolve higher rather than lower.
Bitcoin as a Gauge of Risk Taking
This chart shows Bitcoin and the S&P 500 on the same long-term chart going back ten years. The goal of this chart is to highlight how Bitcoin's strength or weakness has historically been a useful tool for gauging risk appetite in the broader market.
I have shaded several periods in light green to show times when Bitcoin was trending higher. With the benefit of hindsight, these periods generally coincided with strong uptrends in the S&P 500. When Bitcoin is advancing, it typically signals a healthy risk-taking environment, and the stock market has often moved higher alongside it.
The unshaded areas tell a different story. There were multiple periods when the S&P 500 continued to move higher while Bitcoin was already trending lower. These negative divergences eventually preceded meaningful declines in the stock market. In each case, Bitcoin weakness served as an early warning that risk appetite was fading beneath the surface.
Currently, Bitcoin has been trending lower since October of last year, while the S&P 500 has moved sideways in a consolidation. This divergence is something to keep an eye on. While it does not guarantee a market decline, history suggests that sustained weakness in Bitcoin during an extended stock market advance can be an important signal worth monitoring as we evaluate where the market may head next.
Bitcoin at a Critical Long-Term Level
This chart shows Bitcoin going back to 2013 and highlights its long-term uptrend. I have drawn an ascending trendline that connects multiple major lows over more than a decade. This trendline has defined the primary uptrend in Bitcoin and has been tested many times over the years.
I have also marked several major downtrend lines that formed during prior corrections. In each case, Bitcoin eventually advanced above those downtrend lines to go on sizable advances. Importantly, all of those pullbacks occurred while Bitcoin remained above its longer-term uptrend line, keeping the primary trend intact.
Currently, Bitcoin has been declining since October of last year, which is noted with a short-term downtrend line. While Bitcoin is now slightly below that shorter-term downtrend line, the more important level to watch is the long-term uptrend that has been in place for roughly twelve years. A decisive move below Bitcoin’s recent low would also mean breaking that long-term trendline.
Such a break would be a major bearish signal for Bitcoin and could have broader implications for the stock market as well. For now, Bitcoin remains near this critical level, making it an important area to monitor as we assess whether the current market consolidation resolves higher or lower.
Bitcoin Near a Resolution Point
This chart focuses on Bitcoin price action over the past three months, making it easier to see the current technical setup. The goal here is to highlight where Bitcoin is trading relative to both its longer-term trend and its more recent short-term movements.
Bitcoin is currently trading just below its long-term uptrend line, but only marginally. At this point, that trendline has not been decisively violated. Since mid-November, price has also established a short-term uptrend, which I have marked by connecting recent higher lows. This short-term advance is a positive development and suggests buyers have begun to step back in near long-term support.
At the same time, Bitcoin is sitting right at a short-term downtrend line that has defined the decline since October. Actually, it has just peaked above it. This places price between two important technical levels. On the bullish side, Bitcoin has held near its long-term trend and formed a short-term uptrend. On the bearish side, it has not yet broken above its short-term downtrend. Again, it has peaked above it, but that break is not yet decisive.
A decisive move above this downtrend line would be a very bullish signal for Bitcoin and would also support a more bullish outlook for the broader stock market. Given how tightly price is wedged between these opposing trendlines, it is likely that we will see a resolution one way or the other soon.
Scenarios to Watch Going Forward
The most bullish outcome from here would involve several key developments lining up together. Bitcoin would advance decisively above its downtrend line, risk-on areas such as semiconductors would continue to outperform, and major stock indexes would break above the highs of their consolidation ranges. If this occurs during the month, it would signal a strong resolution higher. In that case, I would expect a powerful market advance that would justify being fully invested in growth-oriented stocks. In my view, this is the most likely scenario.
A moderately bullish outcome would occur if Bitcoin and other risk-on areas fail to show strength, yet the major market indexes continue to advance. This would suggest the market can still move higher, but with less confirmation beneath the surface and potentially more volatility along the way.
The bearish scenario would involve Bitcoin continuing to fall, risk-on groups showing clear relative weakness, and the major indexes breaking below their respective consolidation patterns. That combination would signal a significant shift in market character and increase the likelihood of a broader market decline.
Account Update
Client accounts are currently invested at approximately 50 percent of their intended equity allocation. This reduced exposure reflects the market’s ongoing consolidation and the mixed signals that typically accompany this type of environment.
As conditions evolve, I will adjust equity exposure accordingly. If the market resolves higher and the more bullish scenario unfolds, I will look to increase equity allocations. On the other hand, if market conditions deteriorate and the bearish scenario develops, I will reduce exposure and shift to a more defensive posture. As always, our focus remains on managing risk while positioning accounts to take advantage of favorable market conditions.