Bitcoin’s drop to three-week lows today has likely kick-started a bearish move towards the major support at $6,000, technical charts indicate.
The leading cryptocurrency fell to $6,252 on Bitfinex – the lowest level since Sept. 19 – and was last seen trading at $6,300, representing a 5 percent drop on a 24-hour basis.
The failure to capitalize on Monday’s move above the crucial 10-week exponential moving average (EMA) resistance of $6,998, despite the upside break of a key falling trendline, ended up emboldening the bears, as expected.
More importantly, the sell-off witnessed in the last few hours has put an end to a prolonged period of lateral trading. The technical indicators have rolled over in favor of the bears, adding credence to the bearish setup on the long duration charts. Further, the drop in the equity markets may not bode well for BTC, as the cryptocurrency is still being treated as a risk asset.
As a result, the cryptocurrency looks set to extend the drop toward $6,000.
Bollinger band breakdown
The Bollinger bands (standard deviation of +2, -2 on the 20-day moving average) on the daily chart have been moving in a sideways manner since Sept. 22, signaling a lack of clear directional bias in BTC.
As a result, bitcoin price volatility, as represented by Bollinger bandwidth and the gap between weekly high and low, fell to 21-month low and 15-month low, respectively.
A prolonged period of low volatility usually makes way for a big move in either direction. In BTC’s case, that big move will likely happen to the downside towards $6,000, as the cryptocurrency has found acceptance below the lower Bollinger band, that is, an extended period of consolidation has ended with a downside break.
Indicators are biased toward bears
The relative strength index (RSI) breached the rising trendline and fell into the bearish territory below 50.00. Notably, it is pointing lower and is well short of the oversold region (below 30.00), meaning there is enough room for a sell-off in BTC to $6,000.
Meanwhile, the choppiness index has dropped below the 61.8 level and is pointing south, indicating that bearish move is gathering strength.
Further, the moving average convergence divergence (MACD) has produced a bearish crossover.
Long-term charts retain a bearish bias
The bearish view put forward by the negative crossover between the 5-month and 10-month EMAs has gained more credence, courtesy of BTC’s failed breakout and a drop to three-week lows.
Notably, the moving averages turned bearish last month for the first time since September 2014.
Stock market sell-off could add to the bearish pressure around BTC
BTC’s drop to lows below $6,300 comes a day after the Dow Jones Industrial Average (DJIA) shed 800 points. This isn’t the first time that the leading cryptocurrency has followed the action in the equity markets.
As seen in the chart above, BTC pretty much mimicked the DJIA in the last quarter of 2017 and the first quarter of 2018.
The index bottomed out in early April and so did BTC. Both remained solidly bid till April end, however, in the subsequent months, equity rally failed to put a bid under BTC, possibly due to BTC-specific factors like SEC’s disapproval of bitcoin exchange-traded fund (ETF).
Nevertheless, bullish sentiment in equities may have helped BTC defend $6,000 (February low). However, the key support could soon fall, as the equities are looking weak, courtesy of the rising bond yields.
Many argue that BTC is a safe haven asset, although the historical price action suggests otherwise. This is hardly surprising as BTC is still struggling to get mainstream exposure and is much costlier than other classic safe-haven assets like gold (currently at $1,200 per Oz), which is also struggling to post gains.
- BTC risks falling to $6,000 in the short-term. A violation there would allow a deeper drop to $5,870 – support of the trendline drawn from the June low of $5,755 and the August low of $5,859.
- The bearish case would weaken if the 21-month EMA, currently located at 6,122, proves a tough nut to crack. The moving average acted as a strong support in the last four months.
- On the higher side, the 10-day EMA is the level to beat for the bulls. A weekly close (Sunday’s close as per UTC) above that average would put the bulls back into the driver’s seat.
Disclosure: The author holds no cryptocurrency assets at the time of writing.
Bitcoin image via Shutterstock; Charts by Trading View