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What technical analysis tells us about the Bitcoin market
Technical analysis has long been used to invest in cryptocurrencies. The discipline lends itself well to this highly volatile asset class, not only because cryptocurrencies are momentum-driven, but also because they are generally subject to fewer major risks than stocks, which can confuse the dynamics of supply and demand.
Investors can better understand the risk-reward dynamics of the cryptocurrency market by combining momentum indicators and overbought/oversold metrics with the identification of key support and resistance levels. Investors can obtain relative strength data to help them spot opportunities.
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Real-time analysis of the Bitcoin chart shows that, in early May 2024, there was a loss of mid-term momentum indicators like MACD (Moving-Average-Convergence-Divergence), which has a bearish crossover . The loss of momentum suggests that bitcoin is in a corrective phase that is likely to persist for at least a few more weeks. The downside risk can be framed by the next support on the chart, near $51,500, defined by a rate of 38.2%. Fibonacci retracement uptrend from the 2022 low and supported by a rising 200-day moving average.
The loss of momentum must be viewed in a long-term bullish framework. Bitcoin reached new all-time highs in March 2024. This breakout extended Bitcoin’s secular uptrend with implications for months and even years to come. This suggests that once there are signs that a corrective low point is in place, the risk/reward ratio will be more favorable for investors.
THE weekly stochastic oscillator, which is a measure of overbought and oversold conditions, is a useful tool to help identify when a corrective low has been established. For now, stochastics have a margin of oversold (20%), which increases the likelihood that a larger price pullback will occur before the long-term uptrend resumes. A recovery in weekly stochastics from oversold territory would be a positive near-term technical catalyst for bitcoin, regardless of the level at which it occurs.
A useful relative strength entry for identifying potential winners and losers in the cryptocurrency market is a Relative Rotation Chart®, or RRG. The RRG shows the altcoin’s rotation normalized against bitcoin, which is in the center of the chart. There is an inherent clockwise rotation of altcoins in the RRG, which helps us determine when certain altcoins become or disappear relative to bitcoin.
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Most altcoins in the chart are pointing down and to the left, reflecting bitcoin’s strong position in the market, especially during a corrective phase which sometimes sees a flight to safety (in relative terms). We expect most altcoins in the lower left of the chart to eventually turn in favor as riskier positioning resurfaces, a sign that the corrective phase has matured.
