(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Bitcoin may be set to rebound after its price fell sharply since January 29. The cryptocurrency has plunged by roughly 50 percent, falling from an intraday high of approximately $11,500 to a low of $5,870 on February 6.
The recent decline suggests that bitcoin prices are now set to rise back to $10,000. That’s an increase of about 30 percent from its closing price of about $7,600 on February 7.
Bitcoin has been extremely volatile and it plunged dramatically since peaking at nearly $20,000 on December 17, 2017. But while the cryptocurrency may be set to rebound in the coming days or weeks, that is likely to be short-lived unless bitcoin can break free of a bearish downtrend, which has seen an overall price decline of nearly 62 percent.
The daily chart shows bitcoin reached oversold territory on February 5, when the relative strength index fell below 30, reaching a reading of roughly 25. Additionally, the chart shows a significant surge in trading volume that day, with what appears to have been a capitulation-type moment, when the price of bitcoin tanked to an intraday low of $5,873.
We noted in an Investopedia article on February 2 that bitcoin could fall to a critical support level around $5,650. The actual price came within 4 percent of hitting that target. (See more: Bitcoin Investors Face More Pain On Likely 35% Plunge.)
The steep price drops, surging trading volume, and oversold relative strength index (RSI) reading suggest that at the very least, bitcoin is likely to see a rebound, which could take the virtual currency to roughly $10,000.
The hourly chart below demonstrates why you could expect a spike over the next several days or weeks. (See also: Overbought Or Oversold? Use The Relative Strength Index To Find Out.)
Dead Cat Bounce
The chart shows that volume has been slowly declining, which suggests the panic selling seen on February 2 is now subsiding. Additionally bitcoin’s price has been able to climb back over $7,700, which should now be able to act as support going forward. Furthermore, the next level of significant resistance does not come until roughly $10,000.
For now, any rise in bitcoin’s price could be viewed merely as a dead cat bounce, as they say on Wall Street. A dead cat bounce is a temporary rebound from a prolonged decline that is then followed by the continuation of the downtrend. (See also: Cryptocurrency Billionaire Rankings: The Richest People In Crypto.)
For bitcoin’s rise to turn into something more meaningful, the coin’s price would need to rise above its long-term downtrend, which for now comes in at around $12,000.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company’s actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer’s bio and his portfolio’s holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.