The cryptocurrency sell-off continues. After recording a new all-time high during the first week of November, several of the most popular coins have rolled over to the downside. Despite the bearish price action, the current decline appears to be nothing more than a mini-bear market in a long-term secular bull market. Let’s discuss the details.
Bitcoin – BTC generated a new all-time high on 10 November @68,906. However, the market has been unable to sustain its bullish momentum. During the past two weeks, BTC has been drifting sideways-to-lower as the market tries to find a short-term bottom.
At least for now, it appears that Bitcoin generated a false breakout in late October when it penetrated the old high from 14 April (Chart #1). BTC made a second attempt to produce a sustainable bullish breakout on 10 November. However, the rally quickly lost its momentum and began drifting lower (Chart #2). The current chart pattern clearly indicates that Bitcoin formed a double top dating back to 14 April (Chart #3).
How long will this mini-bear market continue? Based on the relative strength index (RSI), Bitcoin is approaching an oversold level. The current RSI reading is 41, the lowest number since 29 September (Chart #4). Based on historical data, the Bitcoin RSI level rarely falls below 40. Therefore, BTC could be very close to forming an important bottom. In fact, the bottom may have occurred @ 55,628 on 22 November.
Despite the fact that the short-term momentum has turned bearish, Bitcoin remains extremely bullish on a long-term basis. BTC generated a massive bullish breakout in December 2020, when it successfully penetrated the old high from 2017 @ 19,862 (Chart #5). As long as Bitcoin stays above 19,862 on a weekly closing basis, the long-term chart pattern will continue to remain very bullish.
Will Bitcoin produce a positive rate of return in 2022? Based on historical data, the average annual rate of return for BTC is 231%. Please review the following table.
During the past ten years, the average annual rate of return for Bitcoin is 231%. If BTC continues this performance for the next 12 months, the price will increase to $190,944. Of course, it’s impossible to accurately forecast the price of any asset class. However, we can analyze Bitcoin’s previous price behavior in order to form an educated guess.
Ethereum – Despite the fact that Ethereum (ETH) has struggled during the past two weeks, the chart pattern continues to remain bullish. A new trendline was established on 20 July. Over the course of the past four months, the bullish trendline has remained fully intact (Chart #6). In order to invalidate the trendline, ETH would need to drop below 3,611. In percentage terms, Ethereum must decline by 17% to flip the chart pattern from bullish to bearish. Although this type of decline is certainly possible, it’s rather unlikely, particularly when we consider the fact that ETH has already declined 11% since 10 November.
One of the most useful technical indicators for Ethereum is the Money Flow Index (MFI). Developed in 1989 by Gene Quong, MFI combines time, price, and volume into an oscillator designed to help traders find low-risk entry points. MFI fluctuates between 0 and 100, very similar to the RSI oscillator. However, the Money Flow Index is considered a superior technical indicator to RSI because it incorporates volume into the equation.
Chart #7 displays Ethereum price activity for the past six months. MFI is shown at the bottom of the chart. Based on historical testing, MFI rarely moves below 20 or above 80. As you can see from the chart, the Money Flow Index captured major reversals in the price of ETH. For example, MFI recorded a reading of 21 on 20 July. This marked a perfect low-risk buying opportunity for Ethereum speculators. MFI generated another important reversal on 9 November, when the index peaked @ 85. This marked the exact top in ETH 4,865. MFI has become one of the most popular indicators for Ethereum traders.
Cardano – One of the most poorly performing coins during the past two months has been Cardano (ADA). A major top was formed on 2 September @ $3.09 (Chart #8). ADA has been drifting steadily lower, which has resulted in a bearish trendline. In order to reverse the bearish trend, Cardano must penetrate 2.16 (Chart #9). At least for now, a move above 2.16 appears highly unlikely. Therefore, the most probable scenario is a trading range with a slight bias to the downside.
Despite the recent decline, ADA has generated a very strong advance during the past 12 months. Based on the fact that Cardano was trading @ 0.12 on 24 December 2020, the value of ADA has increased 1,333%. This makes Cardano one of the best performing cryptocurrencies in 2021.
As we discussed, the short-term chart has a bearish trendline. However, the long-term trend for ADA is bullish. The long-term chart pattern will remain bullish as long as Cardano stays above 1.45 on a weekly closing basis (Chart #10).