Bitcoin’s Money Flow Index Analysis: Did We Touch Down on BTC’s Bottom in December?

A technical indicator shows that Bitcoin might have bottomed in December 2018. The money flow index (MFI) is not as popular as the others for price prediction in the crypto ecosystem, however, analysts are increasingly paying attention to it.

Money Flow Index (MFI)

The Money Flow Index (MFI) is a technical oscillator that uses price and volume for identifying overbought or oversold conditions in an asset. It can also be used to spot divergences which warn of a trend change in price. The oscillator moves between 0 and 100. Unlike conventional oscillators such as the Relative Strength Index (RSI), the Money Flow Index incorporates both price and volume data, as opposed to just price. For this reason, some analysts call MFI the volume-weighted RSI.

An MFI reading above 80 is considered overbought and an MFI reading below 20 is considered oversold. Overbought and oversold doesn't necessarily mean the price will reverse, only that the price (factoring for volume) is near the high or low of its recent price range.

In essence, the MFI verifies or authenticates price trends. Although the indicator diverges from the prevailing market trend.

Popular crypto news outlet Coindesk gave an example for the trend saying:

“For example, BTC dashed hopes of a long-term bullish reversal with a break below $6,000 on Nov. 14 and hit a 15-month low of $3,122 on Dec. 15. The 14-week MFI also nosedived from the high of 43.00 in mid-November, confirming the sell-off in prices. The indicator, however, bottomed out with a higher low at 22.00, contradicting the lower low in bitcoin’s price. That bullish divergence is widely considered an early warning of a bearish-to-bullish trend reversal. Supporting that argument is the fact BTC snapped its record six-month losing streak with a 10 percent gain in February and the MFI rose from 25 to 44.”

Weekly Chart Analysis

In the above graph, it is evident that towards the end of the second week of December the MFI diverged in favor of bullish trends. Towards the end of January, another higher low was carved out at 25. If there is a breakout in the MFI, we can see another bullish divergence soon.

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