Market Wrap: Bitcoin and Stocks Drop; Analysts See Risk of Further Downside

Global markets were in risk-off mode on Friday, sending stocks and cryptos lower.

The U.S. consumer price index (CPI), the most widely tracked benchmark for inflation, rose 8.6% on a year-over-year basis in May, topping expectations that it would decline to 8.2% from April’s 8.3%. That triggered a $500 price drop in BTC earlier in the New York trading day.

Typically, investors reduce their exposure to risk during times of rising inflation, which is not just a U.S. issue. The median global inflation rate is now 7.9% year over year, versus 3.05% last June, according to Deutsche Bank. “The shock value from U.S. inflation has lessened even if today’s print was pretty shocking in itself,” the bank wrote in a research note.

The S&P 500 also declined on Friday, while gold, a traditional safe haven ticked higher. The 10-year Treasury yield returned above 3% as investors continued to position themselves for rising interest rates.

Bitcoin (BTC) was down by 4% over the past 24 hours, compared with a 6% drop in ether (ETH) over the same period. Most alternative cryptos (altcoins), which are deemed to be riskier, underperformed bitcoin on Friday. That suggests a lower appetite for risk among crypto traders.

The bitcoin Fear & Greed Index returned to “extreme fear” territory, reversing a slight uptick over the past few days. Bearish sentiment has been a persistent theme over the past few months, which has kept some crypto buyers on the sidelines.

For now, technical indicators show short-term deterioration in bitcoin’s price action, similar to equities. “For bitcoin, risk now appears heightened of a retest of long-term support around $27,200, noting intermediate and long-term momentum gauges point to more downside,” Katie Stockton, managing partner at Fairlead Strategies, wrote in an email.

Bitcoin declined from the $33,000 resistance level last week, which indicates a loss of upside momentum. That lowers the chance of a prolonged relief rally.

BTC is roughly flat over the past week and has been confined to a choppy trading range. Initial support is seen at $25,000, which is near the May 12 price low.

Momentum on the daily chart has weakened over the past few weeks, suggesting BTC’s downtrend from November of last year could continue over the short term. A downtrend is defined by lower price highs and lower price lows.

Secondary support is at the 200-week moving average, currently at $22,997. Still, a sharp price decline could eventually stabilize at $17,673, which is a 78% retracement of BTC’s prior uptrend from March 2020 to November 2021.

The relative strength index (RSI) on the weekly chart is oversold, which means selling pressure could subside over the next few weeks.

Oversold readings do not indicate a definitive price low, however, especially within the context of a downtrend. Rather, adding a short-term momentum overlay to the 14-week RSI can help determine when oversold signals give way to a potential trend reversal, similar to what occurred in April 2020 and August of last year.

The chart below shows when the RSI’s downside momentum reverses to the upside, or when the red shaded areas turn gray.

At this point, a majority of momentum indicators remain bearish.

Most digital assets in the CoinDesk 20 ended the day lower.

Sector classifications are provided via the Digital Asset Classification Standard (DACS), developed by CoinDesk Indices to provide a reliable, comprehensive and standardized classification system for digital assets. The CoinDesk 20 is a ranking of the largest digital assets by volume on trusted exchanges.