Extremely overbought conditions and other factors seem to have stalled bitcoin’s promising price rally.
Acceptance below $4,912 would validate signs of indecision on the weekly chart (doji candle) and open the doors for a deeper drop to $4,527 (200-day moving average).
A break above last week’s high of $5,347 would invalidate the weekly chart doji candle, although an immediate rally to $6,000 looks unlikely with the daily RSI still flashing overbought conditions.
Bitcoin’s recent price rally has stalled and signs of indecision are evident in the market just a week after a big bullish breakout.
The leading cryptocurrency closed at $5,190 on April 7, confirming an upside break of a bearish channel – the same pattern that paved the way for a bull market in 2015.
So far, however, the follow through to that bearish-to-bullish trend change has been anything but bullish.
The cryptocurrency witnessed two-way business last week, clocking a high and low of $5,347 and $4,912 before closing almost flat at $5,162.
So, the rally looks to have stalled due to the following three factors:
Bitcoin’s 14-day relative strength index (RSI), a widely followed technical indicator, jumped above 70.00 on April 2, signaling overbought conditions as the price jumped over 18 percent to highs above $5,000.
With the price climbing further to a 4.5-month high of $5,345, the RSI rose to near 90 levels, the highest since December 2017.
An extreme overbought reading is considered a sign the rally is overdone and is usually followed by a reaction – a price pullback or a consolidation, as is the case currently with bitcoin.
Prices then made numerous failed attempts to convincingly scale $5,300 in the eight days before a drop to $4,912 on April 12.
Bearish volume divergence
Bitcoin’s 24-hour trading volume across all cryptocurrency exchanges, as calculated by CoinMarketCap, doubled to $21 billion on April 2, validating the bearish-to-bullish trend change signaled by the break above the key resistance of $4,236 and the rally to $5,000.
As the cryptocurrency extended gains further to a fresh 4.5-month high of $5,347 on April 8, though, trading volumes tapered off to $17 billion, reinforcing the overstretched conditions reported by the 14-day RSI.
Hence, the pullback to $4,912 (Friday’s low) was not surprising. Prices have recovered by more than $200 over the weekend, but volumes are down further, to $10 billion. So, the recovery could be short-lived.
Forcing out weak hands before building breakout
The financial markets often test buyers’ resolve by revisiting former resistance-turned-support before building on a major bullish breakout. And that seems to be the case here.
For instance, BTC cleared the 100-day moving average (MA) hurdle on Feb. 19. The newfound support, however, was put to test multiple times in the 10 days to March 4 before a sustained move higher.
On similar lines, prices fell back below the psychological support of $5,000 last Friday and may drop even further to the 200-day MA, currently at $4,527, as the average is widely considered a barometer of a bullish/bearish trend.
The case for BTC shaking out weak holders with a drop to the 200-day MA looks stronger if support a $4,912 is breached.
On the weekly chart, BTC created a doji candle on Sunday, which is widely considered a sign of indecisive market. Interestingly, the doji appeared following a high-volume falling channel breakout. So, it could be considered a sign of bullish exhaustion.
Acceptance below $4,912 – the low of the doji – would confirm buyer exhaustion, opening the doors for a deeper pullback to $4,527 (200-day MA).
On the 4-hour chart, BTC could be creating the right shoulder of a head-and-shoulders bearish reversal pattern.
A break below the neckline support at $4,988 would create room for a drop to $4,629 (target as per the measured move method).
As of writing, BTC is changing hands at $5,142 on Bitstamp, representing a 2 percent gain on a 24-hour basis.
Disclosure: The author holds no cryptocurrency assets at the time of writing.
Bitcoin image via Shutterstock; charts by Trading View