Is Bitcoin’s Rally Over?

BitcoinBTC
had a 17% gain in July that appeared to be enough to calm the cryptocurrency markets after months of liquidation. This has caused a similar debate going on in the stock market as to whether this is a bear market rally or the start of a new bull trend. I added to the debate in July when I was in the bear market rally camp, suggesting that those who remain long “should consider selling on a rally back to $26,500-$27,500”. So far we haven’t gotten that high.

The debate has picked up this week as Bitcoin has fallen since August 10th^th high of $24,892 and the decline of over 7% early Friday is likely to add to the debate. What is today’s technical outlook?

In late April, I warned that Bitcoin’s pullback from the early 2022 lows, line b, was just a break in the downtrend or a continuation pattern. This type of formation is evident in all markets and is generally quite reliable. The break of support in early May, point c, had projected a downside target at the annual S1 pivot support of 27,540. Bitcoin prices stabilized at this level for four weeks before another wave of selling took it below $18,000.

The on-balance volume (OBV) is plotted below the bar chart and is my preferred volume indicator. Volume picked up sharply when bitcoin fell in early May, which was consistent with the price action. The 12th of June^th OBV fell below the long-term support on line 1, as it projected a further decline in the price of Bitcoin. Regular readers of my stock commentaries on Forbes.com will have observed that OBV often leads to both lower and higher prices.

As Bitcoin rallied sharply in mid-July, OBV briefly moved above its descending EMA. This positive action did not last long. It soon turned to the downside and has made convincing new lows this week. The volume increases on May 12^th and 12 June^th helped create a wave of selling pressure that is still in effect. The lower volumes in the last rally (see arrow) were also consistent with a weak rally.

In my frequent discussion of continuation patterns in stocks or ETFs, I point out that in my experience these breaks in the general trend serve to change either an excessive level of bearish or bullish sentiment. Admittedly, bearish sentiment in cryptocurrency markets was very high in late June and early July. The Crypto Fear & Greed Index hit a low of 6 on June 19^th and rose to a high on August 14^th of 46 before falling back to 30 on Thursday. Unlike the stock market sentiment measures that I have followed for decades, I do not yet have such a history with this indicator, but have traded as expected for the past two months.

Now that Bitcoin looks set to close the week below the monthly pivot at $22,231, the next likely target is $19,844 which is the S1 support. Given that some are now convinced that the worst of the sell-off in cryptocurrencies is over, a bounce may not be decided over the next week. There is resistance now at $22,231 and the 20-day EMA at $23,265. The fact that OBV is falling faster than Bitcoin suggests that Bitcoin will once again fall back to the July lows and possibly lower.