- Bitcoin continues to trade flat despite a bullish crossover of the 100- and 200-period moving averages on the three-day chart – a lagging indicator.
- BTC may lack clear directional bias for the next few weeks, historical data indicates.
- Daily and 4-hour charts continue to call a drop to recent lows below $7,800.
- A break above the 200-day moving average at $8,739 is needed to invalidate the bearish case.
A long-term bitcoin chart indicator has turned bullish for the first time in three years.
The bullish crossover sees the 100-period price average cross above the 200-period average on the three-day chart. The last time the chart event occurred was in March 2016.
So far, however, the crossover has failed to buoy prices, leaving the cryptocurrency in the bearish territory below the widely followed 200-day moving average (MA) – a barometer of the long-term trend.
That key hurdle is currently located at $8,739, according to Bitstamp data. At press time, bitcoin is changing hands at $8,310, representing a 0.1 percent loss on the day.
It’s worth noting that MA crossovers are based on historical data and tend to lag price. As such, they usually work as contrary indicators.
Moreover, crossovers between the longer duration MAs are the product of price rallies. As a result, more often than not, the market is overbought by the time crossover happens and the confirmation is followed by a pullback.
Hence, bitcoin’s lack of response to the latest bullish cross is not surprising. Further, bitcoin remained flatlined for months following the March 2016 bull cross of the same MAs, as seen in the chart below.
The 50- and 100-period MAs produced a bullish crossover in the last week of March 2016.
Bitcoin had entered a consolidation phase in the days leading up to the bull cross and remained flat-lined around $420 until witnessing a convincing upside move above $500 in the last week of May.
If history is any guide, BTC may continue to trade in a sideways manner around $8,000 over the next few weeks before resuming the bull run from April’s low near $4,000.
For the short term, there’s scope for a retest of recent lows near $7,750.
Bitcoin has been largely restricted to a narrow range of $8,250–$8,450 since Oct. 11.
The consolidation is preceded by a rising channel breakdown – a bearish setup. Further, bitcoin faced strong rejection above $8,800 on Oct. 11 and fell back below $8,500, invalidating the double bottom bullish reversal pattern confirmed on Oct. 9.
A double bottom is a bullish reversal pattern whose success rate is high when it appears after a notable price drop, which was the case here. Even so, the breakout failed, indicating that bearish sentiment is still quite strong.
Hence, the ongoing consolidation is likely to end with a downside move.
Daily candlestick and line chart
Bitcoin created a big bearish engulfing candle on Oct. 11, torpedoing the recovery rally and shifting risk in favor of a drop to lows below $7,800.
With the cryptocurrency trading well below $8,820 (Oct. 11 high), the bearish candle is still valid.
Also, prices remain trapped below the 200-day MA, which has consistently capped upside since Sept. 27. Notably, the cryptocurrency has struggled to gather upside traction in the last few days, despite the bullish divergence of the relative strength index – again a sign of bearish market conditions.
A bullish divergence occurs when the indicator charts higher lows, contradicting lower highs on price and is considered a strong trend reversal indicator.
BTC, therefore, risks revisiting recent lows near $7,750 in the short term. A violation there would imply a resumption of the sell-off from the September highs above $10,000 and open the doors for $7,200.
The bearish case would weaken if and when prices rise above the key MA, currently at $8,739.
Disclosure: The author holds no cryptocurrency assets at the time of writing.