What Technical Analysis Tells Us About the Bitcoin Market

Technical analysis has long been relied upon for investing in cryptocurrencies. The discipline lends itself well to the highly-volatile asset class, not only because cryptocurrencies are momentum-driven, but also because they are generally subject to less headline risk than equities, which can muddy supply/demand dynamics.

Investors can better understand the risk-reward dynamics of the cryptocurrency market by combining momentum indicators and overbought/oversold measures with the identification of key support and resistance levels. Investors can source relative strength inputs to help spot opportunities.

You're reading Crypto Long & Short, our weekly newsletter featuring insights, news and analysis for the professional investor. Sign up here to get it in your inbox every Wednesday.

Real-time analysis of the chart of bitcoin shows that, as of early-May 2024, there was a loss of intermediate-term momentum per momentum indicators like the MACD (Moving-Average-Convergence-Divergence), which has a bearish crossover. The loss of momentum suggests that bitcoin is in a corrective phase that should persist for at least another few weeks. Downside risk can be framed by the next support on the chart, near $51,500, which is defined by a 38.2% Fibonacci retracement of the uptrend off the 2022 low and bolstered by a rising 200-day moving average.

The loss of momentum should be viewed within a long-term bullish framework. Bitcoin broke out to new all-time highs in March 2024. The breakout extended bitcoin’s secular uptrend with implications for the coming months, if not years. This suggests that, once there are signs that a corrective low is in place, the risk/reward ratio will be more favorable for investors.

The weekly stochastic oscillator, which is a gauge of overbought and oversold conditions, is a useful tool to help identify when a corrective low has been established. For now, the stochastics have room to oversold territory (20%), increasing the likelihood that a deeper pullback in price will happen before the long-term uptrend resumes. An upturn in the weekly stochastics from oversold territory would be a positive short-term technical catalyst for bitcoin, irrespective of the level at which it occurs.

A relative strength input that is useful for identifying potential winners and losers in the cryptocurrency market is a Relative Rotation Graph®, or RRG. The RRG shows altcoin rotation normalized relative to bitcoin, which is at the crosshairs of the graph. There is an inherent clockwise rotation by the altcoins in the RRG, helping us determine when certain altcoins are rotating into or out of favor versus bitcoin.

Most altcoins in the graph point lower and to the left, which reflects bitcoin’s strong position in the market, particularly during a corrective phase which sometimes sees a flight to safety (in relative terms). We would expect most altcoins in the lower left portion of the graph to eventually rotate into favor as more risk-on positioning resurfaces in a sign that the corrective phase has matured.