Bitcoin’s been on an impressive run lately…
Since January 23, bitcoin has rallied over 35%. And on February 12, bitcoin finally got back above $50,000.
The last time bitcoin traded at $50,000 was back in December 2021. This is a major milestone for crypto bulls.
But I’m here today with a warning…
Bitcoin is likely to see a significant pullback very soon.
That doesn’t mean the bull market is over. And it doesn’t mean we won’t see new all-time highs this year.
It just means that bitcoin has run a little bit too far in too short a time.
And just like a runner sprinting for the finish line, bitcoin’s going to need a moment to catch its breath…
Taking a Breather…
There are two kinds of pullbacks.
Price-based pullbacks and time-based pullbacks.
A price pullback is when a market will trade sharply lower after seeing big gains.
On the other hand, a time-based pullback will see a market trade sideways instead.
Both have their advantages and disadvantages.
It’s easier to trade a sideways pullback, but a price pullback lets you buy the market at a steeper discount.
Of course, we don’t have control over what kind of pullback we’re going to see…
All we can do is prepare for either scenario.
Once it becomes clear that bitcoin has topped out, the pullback will start.
At that point, we can look more closely at the price action to figure out what kind of pullback we’re dealing with.
Here’s a chart so you can see why I’m expecting this pullback to start any day now.
Notice how prices have peeled away from the 20- and 50-period simple moving averages (SMA).
These two moving averages plot the average daily closing prices in bitcoin over the last 20 and 50 days.
When prices run away from the SMA the way they have right now, it sets the stage for a classic mean-reversion move.
The market can’t trade too far away from its average closing prices for long. Eventually the market either has to sell off so prices can come back to the SMA, or the market has to trade sideways long enough for the SMA to catch up to prices.
This would be the pullback we’re looking for.
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Time for Patience
The final indicator that tells me this pullback is coming soon is the Relative Strength Index (RSI) on the bottom of the chart.
The RSI is a momentum indicator. A reading above 80 is considered overbought. As you can see, bitcoin is firmly in overbought territory right now.
The combination of an overbought RSI and the trading pattern in bitcoin relative to the two SMA is strong technical evidence.
Our next step is to be patient. Wait for the market to tip its hand. Once the nature of the pullback becomes clear, we can then re-visit bitcoin with an actionable trade plan to buy the coming dip.
Happy trading,
Imre Gams
Analyst, Market Minute