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Bearish Divergence Signals Trouble for Bitcoin’s Election Night Rally

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Bitcoin retraced its way back to the $14,000-level on US election night as investors pinned hopes on a clear win for Joe Biden.

The Democratic nominee promised to launch a vast infrastructural spending program to counter the coronavirus pandemic and its impact on the US economy.

One of the primary components of Mr. Biden’s expansionary policy is a fat stimulus aid for American households and businesses that suffered the most during the pandemic-driven economic lockdown. The proposal has reached an impasse in the US Congress for months due to Republicans’ disapproval. Donald Trump administration offered a smaller package.

Investors anticipate at least $2 trillion worth of financial aid from the Democratic administration.

The Bitcoin Buying Setup, As of Now

As more liquidity enters the economy, they also expect the US dollar to continue its decline. The greenback’s plunging purchasing power could lead the “speculative assets” like gold and bitcoin higher – as it did after the first stimulus aid of $2.2 trillion.

Ty Young, Researcher at data aggregation firm Messari, noted that the stimulus package has always resulted in an upside rally in the S&P 500. The 2009 Recovery Act, for instance, prompted the US benchmark index to swell by 170 percent in the next six years.

Similarly, the CARES Act signing in March 2020 led the S&P 500 up by 43 percent in the next five months. Mr. Young noted that an uptick in the stock market is a signal of further strength for Bitcoin.

“The correlation between the S&P 500 and bitcoin has increased in 2020, most notably following the coronavirus outbreak and March market crash,” the researcher wrote. “If previous statistics show validity on a weaker dollar, stimulus package passing, and an administration change, bitcoin could continue its bullish trajectory corresponding to the S&P 500.”

Bearish Divergence

On Wednesday, Bitcoin gyrated during the Asian hours partially because of a strong selling sentiment near $14,000.

The cryptocurrency’s earlier attempt to close above the level on October 31 had met with similar rejection. It showed that the US election remains a narrative to build a Bitcoin rally, not a one-and-only catalyst. A technical outlook, meanwhile, proved weakness in its uptrend to another extent.

A pseudonymous analyst spotted a bearish divergence on Bitcoin price charts. In retrospect, Bearish Divergences occur when an asset’s price reached a new top while its momentum oscillator moves lower. It demonstrates that bulls are losing grip on the market – and that a potential downtrend move is around the corner.

Bitcoin Bearish Divergence, as spotted by Calm Trader. Source: BTCUSD on TradingView.com

“You should not bet against divergences in Crypto,” the analyst warned. “It’s too dangerous.”

The momentum oscillator slows down also because of a looming macro risk. Mr. Trump has warned that he would contest the election if he losses, alleging fraud in mail voting. A delay in results could further the stimulus impasse by at least one month. That could push the risk-on markets lower, including Bitcoin, and the US dollar higher.





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3 things traders are saying about Bitcoin and the state of the bull market

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Bitcoin’s (BTC) dip below $29,000 on June 22 rocked the markets a handful of analysts to call for a potential drop below $20,000. 

Many traders on crypto Twitter were focused on the formation of a death cross on the Bitcoin chart as an omen for another potential drop in the price but analysts with a more contrarian point of view look at this chart pattern as a signal that it is time to buy the dip. 

Three reasons why some traders still see a bull case for Bitcoin include the appearance of the “spring” stage of the Wyckoff accumulation model, steady buying by long-term holders and the formation of a bear trap at the golden ratio that is similar to moves seen during previous bull runs.

The Wyckoff model says spring has arrived

The Wyckoff accumulation model has been all the rage amongst cryptocurrency analysts over the past month as the price action for Bitcoin has been tracking the pattern relatively closely since the May 19 sell-off.

As seen in the tweet above, Bitcoin’s plunge below $29,000 and the subsequent recovery above $32,000 has some analysts suggesting that the “spring test” seen in phase C of the Wyckoff pattern has been fulfilled. This would indicate that the bottom is in for the current correction and now begins the choppy climb higher.

If this turns out to be true, BTC would enter phase D, also known as the “markup phase” where a new uptrend is established and “pullbacks to new support offer buying opportunities” that are often seen as opportunities to buy the dip.

Related: Bitcoin drops below $36K as century-old financial model predicts big BTC crash

In phase D a breakout to new highs is expected as the cycle completes and prepares to potentially begin again once the move higher is exhausted.

Long term holders are still bullish

Another bullish sign cited by analysts is the steady accumulation by long-term holders.

The Bitcoin long-term net holder position shows that investors actually began to reaccumulate back in late April and they began to significantly increase their activity in May as the price fell into the $30,000 to $40,000. On-chain data shows that these investors have continued to buy into the most recent dip.

This activity suggests that more experienced crypto traders are familiar with Bitcoin’s market cycles and view the current range as a good level to open long positions when fear is high and the sentiment is low. 

The biggest rewards go to those who take the risk to buy an asset amid plunging prices and sentiment, and these are the types of situations where the contrarian traders thriv.

A bear trap lurks at the golden ratio

The third scenario some analysts are focusing on suggests that the current price movements have set up a bear trap that echoes a move seen during the last cycle which involves a pullback to the 1.618 golden ratio extension level which will then be followed by a breakout to new highs.

From this perspective, the market is currently in the awareness phase of the four psychological stages of asset bubbles. After the bear trap occurs, Bitcoin will enter the mania phase where widespread media coverage attracts the attention of new market participants who then chase the price to ever-increasing heights “based on the delusion that the asset will keep going up, forever.”

Previous calls for the possibility of Bitcoin reaching a price of $200,000 by the third or fourth quarter of 2021 by veteran trader Peter Brandt, who was far from alone in predicting its value to surpass the $100,000 mark this year, would suggest that the long-expected blow-off top is yet to come.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.