Russell 2000 ETF (IWM) on Jan. 21, 2022

By the fourth quarter of 2021, nearly every market technician out there was aware of the clearly defined technical support line that was forming throughout the year in the Russell 2000 Index. And technical analysis 101 teaches a break of support is a “change in character,” which carries with it expectations that a new downtrend is underway. While that outlook was common, very few were aware of the massive “volume gap” and its potential significance that resided below that level. These gaps are measured by plotting historical volume at price levels on the y-axis, also known as “volume at price” or “market profile,” instead of the traditional method of plotting volume over time on the x-axis. This is a feature not used by many, which is understandable because, over intermediate and longer-term timeframes, it rarely is a meaningful factor. 

Volume gaps are typically formed when a security (stock, bond, commodity, ETF, etc.) has a parabolic uptrend across a wide price range, over which time a relatively low amount of volume takes place. Then at some future time, when that security “comes down the other side of the mountain,” so to speak, the low volume price range created from the prior parabolic move will often act as an “air pocket” where violent, “gappy” price action can take place.  

In Russell 2000: Walking A Slippery Slope (12/3/21), we highlighted how the historical price action from Q4 2020 (+41% in 12-weeks; 3rd best 12-week period ever) sowed the seeds for this not so common technical phenomenon, particularly for an index of 2000 stocks. Six weeks later, the Russell 2000 broke support leading to its 2nd biggest weekly decline (-8.1%) in ten years, excluding March 2020. Over the ensuing months, the Russell 2000 traded all the way down through the low volume zone for a decline of more than 20% from the prior 8-month support level.  

Russell 2000 ETF (IWM) on Jan. 21, 2022

Volume gaps are seemingly more prevalent these days due to the high number of securities that had strong percentage moves, some parabolic, over a relatively short period of time following the historical fiscal and monetary stimulus pumped into the economy at the end of March 2020. In the spring and summer of 2020, it was the “working from home” stocks that first led the sharp upswing. By November, those strong flows rotated into the “reopening” stocks following the U.S. Presidential election and three straight Mondays of “better efficacy” results announced by the large vaccine makers. Now with the Fed tightening financial conditions, the current market volatility is arguably being exasperated by an increased number of securities, with weak technical support, across relatively wide price ranges.   

That brings us to bitcoin, which is no stranger to parabolic moves. Over a 10-week period starting November 2020 into January 2021, bitcoin advanced from 13,823 to a then-record high of 38,048, measuring gains of 204%. Despite advancing another 64% to a high of nearly 69,000 over the next ten months, January 2021 marked the peak in its weekly RSI (measure of momentum), which then reached 95. The last time its weekly RSI was that high was in 2013 when bitcoin advanced by over 5,400%. 

This goes to show how extreme the advance was over such a short period of time. More importantly, however, over the ensuing ten months in 2021, bitcoin established a clearly defined support level in the 28,800 – 30,000 range.  

The 28,800 – 30,000 range is a critical support level, not simply because of the high number of times it was tested and held firm throughout 2021. The more important factor is the eight weeks beforehand when bitcoin gained 105%. This is the critical price range (13,823 – 28,800), where the support is expected to be weak.  

For common indices like the S&P 500, many data platforms use “time at price” because the index itself is not a trading instrument. “Time at price” for an index is often a near mirror image of the “volume at price” of its tracking ETF. Bloomberg uses “time at price” for cryptocurrencies as well. Thus, the assumption is made that the “time at price” bars on the left y-axis of the below weekly period chart would be “in-line” with the “volume at price” bars if that data were available.     

While bitcoin is already down more than 55% in a little under six months, a break of the 28,800 support argues a similar percentage decline could occur in a shorter amount of time. There is nothing that says price must fill this low volume range, and to be accurate, there is greater price history (i.e., support) down at the 19,500 level. However, with Jerome Powell on “autopilot” for two more 50 bps hikes over the next two FOMCs, there is an increasing risk that this 15-month support at 28,800 does not hold.  

In an extreme scenario, if bitcoin were to reach 13,800, that would measure a decline of 80% from its November high. In its recent history, bitcoin declined 71% into its 2020 low, -84% into its 2018 low, and -86% into its 2015 low. That could be a helpful guide for those looking to manage risk or “buy the dip.” 

Parabolic move in Bitcoin

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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