Bitcoin Faces Price Pullback Amid Extremely Overbought Conditions

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• Bitcoin’s quick drop from a 4.5-month high of $5,345 to levels below $5,000 validates the extremely overbought readings on the 14-day relative strength index.
• BTC could consolidate around $5,000 with a negative bias over the next day or two. A pullback back to key support levels at $4,672 and $4,565 (200-hour MA) can’t be ruled out.
• The longer-term outlook will remain bullish as long as bitcoin’s price holds above the former resistance-turned-support of $4,236.

Bitcoin (BTC) could be in for a minor price pullback as the RSI is showing the most overbought conditions for 16 months.

The crypto market leader cruised past the crucial resistance at $4,236 on Tuesday, confirming a longer run bearish-to-bullish trend change and hit a 5.5-month high of $5,345 yesterday, according to Bitstamp data.

With the near 30 percent rally to 4.5-month highs seen in the last 48 hours, bitcoin’s 14-day relative strength index – a widely-followed momentum indicator – has jumped above 70.00, indicating overbought conditions. In fact, the RSI is currently seen at 89.11, its highest level since December 2017.

An overbought reading on the RSI is often taken to be a sign of impending bearish reversal. In reality, however, an above-70 print merely indicates that the rally is overdone and a reaction – a price pullback – could be in the offing.

These overbought indicators become valid only when the price begins to flash early signs of buyer exhaustion, which seems to be the case with BTC.

The cryptocurrency witnessed a sharp drop to $4,800 within two hours of hitting highs above $5,300 at 21:00 UTC yesterday and is now struggling to hold onto price points above $5,000.

As a result, price consolidation or a deeper pullback to $4,600 could be seen in the next couple of days.

Daily and 4-hour charts

The long upper shadow attached to Wednesday’s candle (above left) indicates the bullish move is running out of steam.

Validating that argument is the big bearish engulfing candle seen in the 4-hour chart (lower left), which indicates that the period began with optimism but ended on a pessimistic note.

Both candlesticks add credence to the extreme overbought reading on the 14-day RSI (right).

Hourly chart

On the hourly chart, the RSI has rolled over from the overbought territory, having charted lower highs over the last 48 hours, contradicting the higher highs on price.

That bearish divergence also favors a price pullback to key support levels lined up at $4,672 and $4,565 (200-hour MA).

Disclosure: The author holds no cryptocurrency assets at the time of writing.

Bitcoin image via Shutterstock; charts by Trading View