Flash Crash Warning!

TLDR:

F.U.D. Courtesy of The Fed

A LOT has changed since NOV ATHs….

We sit on the edge of a Bear Market in many assets, and have a new 8000lb Gorilla in the room, (a hawkish FED that um, day trades).

Meanwhile, crypto has recently correlated with the VIX (-94% on Friday), so now the SPX and Crypto are joined at the hip:

ATHs in VIX Correlation

What’s interesting here is how much the order book has dried up. The book is running very thin (that trend is ongoing), which means that prices can bounce a lot more then would otherwise be the case. It also means that prices will likely come under even more pressure (high volatility does not support price increases in the average asset), in the short term.

Additionally, this set up may create some extra wild price swings that may whack the over leveraged margin & futures traders. How that will affect Exchange Operability remains to be seen-but let’s just say it won’t help them stay more stable. 😉

Here are some charts that help illustrate the problem, they look like Rorschach (ink blot) Tests:

S&P Book Depth Is Shrinking…see that flash crash point in DEC Week 1?

Nasdaq Book Depth Is Shrinking…

Bid/Ask Spread is HUGE here…..

These are indications that volatility is likely to remain significantly elevated in the days ahead-atop a level that is already very high. This also suggests that the price declines we have seen in the cryptoverse correction are not over. What’s more, January is usually one of the most chill months for volatility-so the fact that we are already running high in a normally chill month-is note worthy here:

January is supposed to be chill bro’……but ain’t!

Here is a chart of Volatility, and Volatility of Volatility, overlaid:

The VIX is Now Trending Up, Up, Up and away……

At present, volatility is retreating off its highs, but the trend is clear-and that trend is UP.

Volatility is now bullish trend, where for all of 2021 it was not. That is a huge sea change. As long as the correlation to the VIX remains as titanium strong as it is at present, this suggests that prices will remain under pressure for quite some time. (No Virginia, Coin #1 will not be hitting $100k any time soon-as in this year dear.)

Meanwhile the book is thinning to where it was at the December Flash crash…..ruh roh!

I am not a chicken little, and I am not given to fear. That said, the set up here is ripe for whaler whack-a-mole, Skynet’s favorite game of chance.

The takeaway?:

Traders: be on the margin watch!

HODLr’s: buckle up for more roller coa$ter action…..

Good Luck!