- Bitcoin's 50- and 200-day moving averages (MAs)look set to produce a death cross in the next week or two. Historical data shows the cryptocurrency could bottom out if the cross is confirmed.
- BTC may drop to support near $7,430 before then.
- A break above $8,820 is needed to invalidate the bearish lower-highs set up and confirm a bullish reversal.
Bitcoin may be close to bottoming out, as a popular contrary indicator is teasing a bearish turn for the first time since March 2018.
Potentially producing a so-called death cross, the 50-day moving average is falling fast and may drop below the 200-day MA over the next week or so. If confirmed, the chart event would be the first such crossover of these averages since March of last year.
A death cross is a long-term bear market indicator, according to technical analysis theory. In reality, however, it is a lagging indicator and often ends up trapping sellers on the wrong side of the market, as seen in the charts below.
The 50-day MA fell below the 200-day MA on March 31, 2018 (above left), following which the sell-off stalled around $6,500 and the cryptocurrency rose back to highs near $10,000 in the first week of May.
Note that the relative strength index (RSI) was reporting oversold conditions when the crossover happened.
A market is often oversold by the time a cross is confirmed, as the MAs are based on past data and the crossovers are a product of price rallies or sell-offs.
In mid-September, 2015, bitcoin's pullback from highs near $250 also ran out of steam near $220 with the confirmation of a death cross.
The cryptocurrency remained sidelined in the range of $220–$250 in the following weeks before breaking into a bull market at the end of October 2015. What followed was a meteoric rise to a record high of $20,000 by December 2017.
The impending crossover may also turn out to be a bear trap, as bitcoin will most likely be oversold by then, having dropped more than 40 percent already from June's high of $13,800.
Additionally, the cryptocurrency is set to undergo a mining reward halving in May 2020 and may repeat history by picking up a strong bid six months ahead of the event, as pointed out by popular analyst @100trillionUSD.
That said, the ongoing pullback from the recent highs above $8,800 looks to have legs, as per the technical charts. Therefore, bitcoin will likely remain on the defensive in the days leading up to the crossover and bottom-out below recent lows near $7,750.
The spread between the 50- and 200-day MAs currently stands at $417 – the narrowest since early May – and indicates that bullish sentiment is at its weakest in over five months.
Daily, 6-hour and weekly chart
Bitcoin bounced up from the 100-week moving average last week and witnessed a double bottom breakout on the 6-hour chart (above left).
Even so, the cryptocurrency failed to take out the 200-day MA on Oct.11 (above right) and has dropped to levels below $8,000, forming a bearish lower high pattern above $8,800.
Put simply, the bearish sentiment is still quite strong and a deeper slide below the 100-week moving average at $7,755, possibly to support near $7,430 (multiple daily lows in early June) could be in the offing ahead of the death cross confirmation.
The outlook would turn bullish if and when prices rise above $8,820, invalidating the bearish lower highs setup.
Disclosure: The author holds no cryptocurrency assets at the time of writing.
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