Recent Price Action
Bitcoin – For the first time since mid-November, Bitcoin managed to generate a sustainable weekly advance. More importantly, BTC closed above the critical price level at $39,713 (Chart #1). Therefore, the short-term chart pattern has turned bullish. However, it’s much too early for the bulls to declare victory.
The momentum could easily reverse to the downside. BTC is still extremely vulnerable to lower prices. The next critical support level is $31,710 (Chart #2).
The weekly chart continues to remain bullish. Chart #3 displays the weekly support level at $28,383. The chart will turn bearish on a Friday close below $28,383. Based on the recent strength in Bitcoin, it appears unlikely that the bears will be able to push the price below this major support level.
Chart #4 displays the Relative Strength Index. RSI is a momentum oscillator developed in 1978 by Welles Wilder, Jr. RSI is one of the most popular technical indicators among active traders. It works incredibly well with Bitcoin. The trading rules are very simple: a reading below 25 generates a buy signal; a sell signal is activated when RSI moves above 75. Traders prefer using RSI because it produces very few signals.
As you can see from the chart, a buy signal occurred on 24 January, when RSI dropped below 25. This turned out to be an excellent buy signal for BTC. It marked the first time since 13 March 2020 that the RSI oscillator fell below 25. A sell signal was activated when RSI moved above 75 on 20 October 2021.
Although it’s much too early to be 100% certain, it does appear as though Bitcoin formed an important bottom on 24 January at $33,076. In order to confirm a major low, BTC must trade above $53,853 (Chart #5).
Ethereum– ETH has generated a sharp rally during the past few trading days. The chart pattern reversed from bearish to bullish when the price exceeded $2,807 on 4 February (Chart #6). As long as ETH stays above $2,807 on a weekly closing basis, the momentum will remain in favor of the bulls.
The next important resistance level is $3,888 (Chart #7). It’s highly unlikely that ETH will penetrate this heavy resistance level any time in the near future.
Polkadot– DOT generated a substantial rally in 2021. From its low in December 2020, Polkadot increased 1,111%. A short-term top was formed on 4 November at $55.06. DOT drifted lower throughout the final two months of 2021. It appears that an important bottom was formed on 24 January 15.91 (Chart #8).
The chart pattern remains bullish as long as DOT stays above $12.66 on a weekly closing basis (Chart #9).
In terms of technical analysis, one of the most popular indicators is the Aroon Oscillator. This indicator works incredibly well at identifying important tops and bottoms in speculative assets like cryptocurrencies. The Aroon Oscillator is similar to the Relative Strength Index (RSI). It is a measuring device used to determine if an asset is overbought or oversold. The index fluctuates between -100 and +100. A reading of -100 indicates a market that is substantially oversold. A reading of +100 identifies a market that is heavily overbought.
The Aroon Oscillator performed incredibly well at identifying an important top and important bottom in DOT (Chart #10). On 20 July, the oscillator recorded a reading of -96, which indicates a deeply oversold market. The Aroon Oscillator was able to pinpoint the exact low in Polkadot at $10.39. Polkadot generated a top on 4 November $55.06. The Aroon Oscillator successfully identified the top by recording a reading of +96. As you can see from the chart, the Aroon Oscillator is quite useful in its ability to recognize tops and bottoms.