Is Bitcoin’s Rally Over?

The BitcoinBTC
had a 17% gain in July that seemed to be enough to calm the cryptocurrency markets after months of liquidation. This has caused a similar debate that is 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 as I was in the bear market rally camp suggesting those still long “should consider selling on a rally back to the $26,500-$27,500”. So far we have not gotten that high.

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

At the end of April, I warned that the rebound in Bitcoin from the early 2022 lows, line b, was just a pause 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 yearly S1 pivot support at 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 it is my favored volume indicator. The volume rose sharply as bitcoin dropped in early May which was consistent with the price action. On June 12^th the OBV dropped below the long-term support at line 1, as it projected a further decline in the price of Bitcoin. Regular readers of my stock commentary on Forbes.com will have observed that the OBV often leads prices both lower and higher.

When Bitcoin rallied sharply in the middle of July the OBV briefly moved above its declining EMA. This positive action did not last long It soon reversed to the downside and has made convincing new lows this week. The volume spikes on May 12^th and June 12^th helped create a wave of selling pressure that is still in force. The lower highs in volume on the recent rally (see arrow) was also consistent with a weak rally.

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

Now that Bitcoin looks ready to close the week below the monthly pivot at $22,231 it makes the next likely target at $19,844 which is the S1 support. Given that some are now convinced the worst of the selling in the cryptocurrencies is over a bounce cannot be ruled in the next week. There is resistance now at $22,231 and the 20 day EMA at $23,265. The fact that OBV is dropping faster than Bitcoin does suggest that Bitcoin will again drop back to the July lows and possibly lower.