Dollar index loses key level: Bitcoin cleared for reversal?
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Bitcoin price is experiencing a pullback as this content is being written. However, after yesterday’s close in the DXY Dollar Currency Index, the top cryptocurrency may be cleared for reversal.
The dollar lost a key level that previously led to some of the biggest rallies in BTC history.
Correlations between Crypto and Fiat Currency
Correlation is usually found to some degree across almost all assets. It is rare for two assets to show no correlation, and instead tend to show strong and weak, positive and negative correlations.
Technical analysts or investors look at asset correlations for diversification purposes, and to reduce risk in a portfolio. For example, a crypto-heavy portfolio will not benefit much from adding technology stocks due to a strong correlation. It can even increase risk as an entire portfolio pulls down at once.
Few assets are as negatively correlated as Bitcoin against the dollar. This is because the most dominant trading pairs have both BTC and USD. In the BTCUSD trading pair, BTC is the base currency and USD is the quote currency.
This is precisely why the DXY Dollar Currency Index losing a key level can have a dramatic impact on the price per BTC.
The dollar has lost the middle-Bollinger Band | DXY on TradingView.com
Why the Dollar Falls Means Bitcoin Pops
The DXY Dollar Currency Index is a weighted basket of top currencies from around the world. None of them are Bitcoin. However, there is no better measure of the strength of the dollar than the DXY.
In technical analysis, higher timeframes produce the most dominant signals. Not all timeframes are treated equally, so experimentation can provide early clues about what’s to come. For example, the 4-week time frame only reduces 2-3 days off every month interval. This time frame gives slightly earlier signals than the monthly one.
While the monthly DXY is resting on the middle Bollinger band, the level has already been lost on the 4-week time frame. The last candle closed below the 20-period SMA, which forms the basis of the upper and lower bands.
How does this have anything to do with Bitcoin, you ask? When the USD was strong in 2022, it crushed BTC on the trading pair. If the dollar is ready to plunge, the BTC side of the trading pair should rise again. In fact, every time DXY lost this level, BTCUSD had one of its biggest rallies in the last decade.
The $DXY opened his 4W candle below the middle of the BB.
After a close, it usually moves to the lower Bollinger band.
Each time this happened, it resulted in the biggest, most bullish moves #Bitcoin during the last decade.
But yes, no new ATH this year because halving 🙄 pic.twitter.com/i7X0FsfjYN
— Tony “The Bull” (@tonythebullBTC) 24 April 2023
