Chart Of The Day: Bitcoin Primed For A Corrective Rally (Before It Heads Lower)

06/16/2022

2 minutes read

2022.06.16 15:15

During the current leg down, Bitcoin—trading at $21,220 at the time of writing—has lost a third of its value since this particular slump started on June 7. Since its November 2021 all-time high, the leading digital currency has plunged 70%.

Cryptocurrencies—the most speculative and volatile of assets—topped out around two months before stocks started slipping. The immediate, harsh trading environment for the digital token class has also stripped away the myriad conceits that were once bandied about to crypto investors. It turns out Bitcoin and its digital peers are neither safe haven assets, nor are they an inflation hedge.

Digital currencies led stocks into a bear market. And though US inflation has reached its highest level in 41 years, Bitcoin concurrently has crashed. Plus, given its sharp price deterioration, it goes without saying that Bitcoin is hardly a store of value.

Though we have been assertively negative on Bitcoin since the start of 2022, that doesn’t mean traders can’t take advantage of opportunities involving the cryptocurrency if and when they occur. For example, we believe we could now be witnessing a Dead Cat Bounce for Bitcoin. That means it could go higher in the short-term, before continuing to head lower.

Here’s why:

Chart Of The Day: Bitcoin Primed For A Corrective Rally (Before It Heads Lower) BTC/USD Daily

Bitcoin recently developed an imperfect hammer. However, the candlestick is potentially flawed due to a short upper shadow, which might deflate some of the bullish mechanism that drives a rally after a hammer.

Still, we’re not relying on the hammer alone. The hammer’s development was near the bottom of the cryptocurrency’s Falling Channel, which may provide support. So, from a risk-reward perspective, it’s an attractive trade.

As well, the Relative Strength Index might be suggesting that momentum is bottoming as conditions become oversold. The RSI reached 23 for the first time since January 2022. At that time, the price rebounded about 40% in roughly two months.

Here’s a closer look at what’s currently going on:

Chart Of The Day: Bitcoin Primed For A Corrective Rally (Before It Heads Lower) BTC/USD Hourly Chart

BTC’s daily price is retesting yesterday’s daily hammer. The chart above shows what it looks like zoomed in. The price is retesting yesterday’s low, which formed an hourly H&S bottom. The pattern will complete with an upside breakout.

Note that the RSI is slipping below its support, suggesting the price will continue falling, blowing out the reversal. We consider the 30-level on the RSI—which has proven significant for support and resistance—to be the red line for momentum to support the price.

Trading Strategies

should sit this one out, as it goes against the primary trend. Traders at this cautious level should short Bitcoin when the rally fizzles.

would enter a long position if the H&S completes.

could enter a long contrarian position, considering the proximity of the price to the presumed support. Money management is crucial. Here’s a generic example:

Trade Sample – Contrarian Long Position