The correlation between the S&P 500 and Bitcoin is only increasing, inching closer to reaching levels where in the past the cryptocurrency strengthened.
Meanwhile, the S&P 500 just closed its January monthly session outside of a key trend line the entire world of finance has been watching. Here is why a possible breakout in the stock market could propel BTC higher along with it in a perfect storm scenario.
The Stock Market Closes Monthly Candle Above Key Trend Line
The S&P 500 index is often considered the best measure of the overall health of the US stock market, and indirectly, the economy. It’s used as a benchmark to compare the alpha and beta of other assets and individual stocks.
Positive performance in the SPX is associated with periods of prosperity and profitability. If the stock market is doing well, it is a signal for investors to switch to risk-on strategies.
The S&P 500 is potentially breaking out of the upper boundary of a long-term trading pattern: a descending broadening wedge. Price is holding above the pattern on the daily timeframe through the January monthly that just came to a close.
And while further upside would bode well for cryptocurrencies by default, increasing correlation between BTCUSD and the SPX is what makes a possible breakout in the stock market that much more bullish for Bitcoin.
Bitcoin Correlation With S&P 500 Index Increases
The chart above shows the breakout in action in the daily and monthly timeframe in the S&P 500. Bitcoin price is moments away from closing its January monthly candle with more than 40% ROI. Other cryptocurrencies have significantly outperformed during the month.
Both BTCUSD and SPX rising in tandem this month has restored the increasing direction of the correlation between the two vastly different investment vehicles.
With a correlation coefficient of 0.88, the SPX and BTCUSD are at some of the strongest positive correlations historically. Past bear markets in crypto have switched Bitcoin into negative correlation territory. This time, however, has been different.
An increasing correlation has in the past been associated with some of Bitcoin’s most explosive bullish moves to the upside – especially after reaching a correlation of 0.93. With the correlation potentially increasing and a possible breakout in the SPX, could there be a perfect storm brewing for the top cryptocurrency by market cap?
