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Bitcoin Analysis: More Downside Risk Despite Increase

With momentum metrics indicating sell-side pressure and repeated drops below $10,000 observed last week, bitcoin price is currently at risk of significant downward movements despite a brief increase in price at the end of last week.

Key developments over the past week;

  • A popular sentiment indicator recorded lows not observed since before February 2018

  • Bitcoin dominance remains near highs but some analysts have been noting the possibility of a near to mid-term outperformance in the altcoin market

  • The price of bitcoin dropped below the $10,000 level on four of the seven trading days last week

Bitcoin Price Performance

The mounting seller momentum identified in last week’s analysis materialised in a downside movement of roughly 2% last week for the price of bitcoin. Four of the seven days of trading resulted in the price of bitcoin trading both above and below the $10,000 level further emphasizing its importance as a trading level to monitor.

Price rebounded strongly as the weekly candle drew to a close. The price appreciated 8% open-to-high over three hours. This run-up crossed over into the new weekly candle. The increase so far this week has reversed the losses observed in trading last week. The appreciation can be observed on the chart below. After recording a high of approximately $10800, price quickly retraced to close around the $10521 level, a level which has acted as both support and resistance in price action since mid-August. Price continued to form a lower high and the following increase failed to form a higher high, resulting in a swing failure pattern forming as indicated on the chart. Such a pattern increases the odds that the near-term price action will be to the downside.

Price action broke below the $10,000 mark several times last week. More consolidated trading took place around this point than is usual. Typically, trading around $10,000 results in a clear break above or below. Each drop below ultimately found sufficient buying pressure to bring price back above. However, there is a possibility that a future drop below meets strong selling pressure driving the price significantly below the $10,000 level.

The seller momentum on the longer-term weekly chart continues to mount with the RSI and MACD both declining. The MACD and RSI are both commonly used as metrics to gauge buyer or seller momentum. The MACD (in yellow) recently crossed over its signal line to the downside (in red), a crossover commonly considered to precede downward price action moving forward. The declining momentum indicators combined with bitcoin’s repeated drops below $10,000 indicate bitcoin is currently in a vulnerable position where it could suffer a significant downward movement.

The 50% retracement level between the December 2017 high and the December 2018 low remains an important level for bitcoin price to close above on the weekly chart for a continuation of the uptrend which started in Q2. Every rise above this level since the start of Q2 has failed to close above on the weekly chart indicating high levels of selling pressure above this area.

Although the price traded below the $10k level several times in intraday trading last week, it failed to close below on the daily chart. This indicates sufficient buying pressure coming into play to maintain price levels above the psychological $10k point. However, repeated tests of a support level progressively reduces buyer liquidity on each test. With fewer buyers on each test of $10k, this serves to put bitcoin in an increasingly vulnerable position on each progressive return to sub-$10k territory.

Altcoins Approaching Capitulation?

The dominant trend of the cryptocurrency markets has been a phenomenal performance in bitcoin since the start of Q2 with altcoins largely lagging in performance. Only a small number of altcoins have managed to outperform Bitcoin year-to-date. Notable examples include Binance Coin, Ravencoin, and Chainlink. However, analyst Willy Woo noted that the ratio of altcoin market cap to bitcoin market cap has been approaching a support trendline after declining since the start of 2018. A case can be made based on this that altcoin declines (in BTC price) may be approaching capitulation.

Reflective of the outperformance in bitcoin, the percentage that Bitcoin represents of the total cryptocurrency market cap is close to 2019 highs. The figure is currently 71% with a 2019 high of 72.4% observed. A consolidation in this figure over the past two weeks further strengthens the case that altcoins may be approaching capitulation.

Market Sentiment

The Crypto Fear & Greed Index reached levels not observed since before February 2018. The Crypto Fear & Greed Index gauges sentiment in the cryptocurrency markets by tracking metrics such as Google search queries, social media activity, and data related to price. Levels as low as 5 have not been observed in the historical data present on the website which traces back as far as February 2018. Research from Delphi Digital indicates that price has historically performed strongly in the weeks following index readings below 20 which may be playing into the rebound observed approaching the end of last week.

Crypto Greed and Fear Index, Source:

Trading Takeaways;

An 8% appreciation was observed at the end of trading last week but this was followed by a swing failure pattern forming which increases the odds of near-term downside movement. In the longer-term outlook, several factors suggest that there is more downside risk to bitcoin price than upside:

  • Repeated drops below $10,000 last week

  • Longer-term momentum indicators declining

  • Bitcoin price in a more vulnerable position on each return to sub-$10k territory

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