Technical Analysis Shows Bitcoin is Heading for A Crash Due to Trading Indicators
Bitcoin, the most popular cryptocurrency having surged from $4,150 to $5,000 on April 2, and currently trading at $5,200 is in an overbought zone according to the daily Relative Strength Indicator (RSI), a technical indicator that shows the speed and change in the price movements of a virtual asset.
RSI of 87 Shows Bitcoin is Extremely Overbought
According to the daily RSI, bitcoin currently has a value of 87 which translates into an extremely overbought level given that 70 denotes overbought and around 30 is an indicator of an oversold level.
A commodity that has been overbought in the financial terms indicates an increase in its intrinsic value over what is expected, and as such, the tendency for a price correction is higher in the near future.
That being the case, bitcoin's overbought zone of 87 (highest since the year began) can be correlated with a high probability for a market crash due to a similar pattern that was exhibited on December 7, 2017.
As at that time, the market closed at a price of $16,880, and there was an upside momentum which placed the RSI at 95. The extreme overbought which was triggered led to a correction to $13,214, a 23 percent decline in the virtual asset's market value.
The price depreciation and market sentiment brought down the RSI to 72 before bitcoin hit its all-time high of $20,0000, even though the cryptocurrency winter of 2018 is what came afterwards.
Daily RSI Has Slowed down and is close to Exhaustion
Nonetheless, the daily RSI has slowed down for now and is close to exhaustion which could trigger the next major price drop where a downside target of 50-period EMA will be maintained and the same 200-daily moving average.
If that happens, then the RSI has the potential of declining to an overbought level of 70 and could even move further down to 50, which denotes a proven accumulation area.
There's also uncertainty if the bulls or bears will be in control due to the historical events which show that there has never been a strong upside action as long as the weekly RSI indicated a value below 56.
An instance of this is the spike that occurred in November-December 2017, where the RSI broke above 56 briefly. It also exhibited the same pattern in January 2012, April 2013, and November 2013, where it was around 56 ahead of bitcoin's price surge.
Whichever is the case, investors must make informed decisions at any point in time in order not to incur losses especially when there is still a significant level of uncertainty.