Bitcoin and Hang Seng's Stalled Rally Might Mean Wider De-Risking Ahead, TradFi Firm Says

Bitcoin's BTC$91,529.59 ascent that began a month ago has hit a wall this week, with upward momentum running out of steam near key technical resistance. A similar pattern has emerged in Hong Kong's benchmark equity index Hang Seng.

That has one traditional finance (TradFi) observer mulling a possibility of a renewed risk aversion across all corners of the financial market.

"Failures in BTC and Hang Seng are technical warnings signs that these early 2022 halcyon vibes may not last all year," Brent Donnelly, trader and president of Spectra Markets, said in a note sent to clients late Monday.

Donnelly's comments are evidence of bitcoin's strengthening reputation as an advance indicator of risk sentiment among seasoned traders. In the past, the world's largest cryptocurrency has led major tops and bottoms in the S&P 500 by several weeks.

Bitcoin fell by nearly 4% on Monday, turning lower from $24,000. A similar bull failure was seen above $24,000 in August.

The Hang Seng has also turned lower from resistance, which can be traced back to June 2022.

"The bitcoin chart looks a bit like the Hang Seng chart on page 1," Donnelly noted. "BTC got to $24,000, just shy of the $25,100/$25,400 pivot. This is another reason for caution on risky assets."

Stocks, bonds and cryptocurrencies have chalked up a steep rally in recent weeks, while the U.S. dollar has declined in hopes that the Federal Reserve would pause interest rate hikes in May and cut rates later this year.

The Fed is likely to lift the benchmark borrowing cost by 25 basis points to a new range of 4.5% to 4.75% on Wednesday. Analysts expect Fed President Jerome Powell to push back against market expectations for rate cuts during the post-rate decision press conference, putting a downward pressure on risk assets.

Donnelly believes several uncertainties are on the horizon that could zap the risk appetite.

"With so many scenarios in play this year (no landing, soft landing, recession lite, hard landing, crash landing) ... I don't think the market is all that likely to land on the correct answer in the first weeks of 2023. Unlike 2022, which was a clear, one-way narrative (Fed on auto-pilot, tightening into a bubble) ... 2023 is much less clear," Donnelly said.