Bitcoin ended a two-week period of consolidation with a drop to six-week lows earlier today.
The leading cryptocurrency by market value fell below $3,470 at 04:45 UTC, confirming a downside break of a triangle pattern. That range breakdown was followed by a quick slide to $3,357 – the lowest level since Dec. 17 – according to Bitstamp data.
A prolonged period of consolidation usually yields a big move in the direction of the breakout. For instance, BTC ended a multi-week-long trading range with a move below $6,000 on Nov. 14 and what followed was a violent sell-off to levels below $4,000.
However, the duration of the recent consolidation was shorter than the one seen before the big bearish move of Nov. 14. So, the magnitude of any post-breakdown move would likely be smaller too.
Nevertheless, the latest range breakdown could at least yield re-test of December lows near $3,100, as the primary trend represented by the downward sloping 10-week moving average (MA) is negative.
The bearish case looks even stronger if we take into account the bull failure seen over the weekend. The cryptocurrency had turned the tide in favor of bulls with a move to $3,658 on Saturday. That triangle breakout, however, petered out with prices falling back to $3,500 yesterday. A failed breakout is widely considered a strong bearish signal.
Further, gold seems to have found acceptance above $1,300. The safe haven asset and bitcoin – still a risk asset – have been inversely correlated since November.
As of writing, BTC is changing hands at $3,430, representing a 3 percent drop on a 24-hour basis.
On the daily chart, BTC charted a gravestone doji on Saturday, which occurs when the day begins on a positive note and ends with the bears pushing prices all the way to back to its opening price. Therefore, it is considered a bearish sign.
Validating that argument is the negative follow-through as represented by the drop to six-week lows today. The 14-day relative strength index (RSI) is also reporting range breakdown below 40.00.
So, it could be argued that the path of least resistance is to the downside and the bulls will likely feel emboldened only above $3,658 (the high of the gravestone doji candle).
As seen in the above chart, BTC’s triangle breakout on Saturday was short-lived. Further, it seems to have found acceptance under the lower edge of the triangle.
The chart also shows Bollinger Band breakdown – a convincing break below the lower band.
The RSI, however, is reporting oversold conditions. As a result, BTC may revisit $3,500 before resuming the drop toward the December lows.
The 10-week MA is still trending south, indicating a bearish setup. There are, however, signs of indecision in the market place, as represented by last week’s classic doji candle.
Further, a sustained drop in trading volumes likely indicates bearish exhaustion.
The outlook, therefore, would turn bullish if BTC ends this week above $3,658 (doji candle’s high).
- BTC risks falling to the December low of $3,122 in the next few days, having confirmed a range breakdown with a drop to six-week lows today.
- The drop to December lows could be preceded by a minor bounce to $3,500, as the RSI on the 4-hour and the hourly chart is reporting oversold conditions.
- The outlook would turn bullish if the oversold conditions on the 4-hour RSI end up yielding a convincing move above $3,658 (the high of both the gravestone doji and the classic doji).
Disclosure: The author holds no cryptocurrency at the time of writing.