After the Grayscale Bitcoin Trust ETF’s historic spike to new highs, it would be natural for investors to get spooked by a bearish daily chart pattern the day after its most extreme “overbought” reading in more than six years.
The exchange traded fund’s GBTC trading history, which dates back about nine years, well before it was converted into a spot bitcoin ETF, shows that being truly overbought is much more a sign of its bullish ability than a warning of a fix imminent. But what might make this time different is the pattern of “bearing engulfing” that appeared on Tuesday.
Before Grayscale Bitcoin Trust’s 8.5% sell-off in afternoon trading Tuesday, it had risen 32.4% on a six-day winning streak to close Monday at a record high.
Chart watchers try to put such a rally in historical perspective by monitoring the relative strength index (RSI), a momentum indicator that measures the relative magnitude of recent gains and losses.
RSI values above 70.00 are seen by many as signals of an overbought condition, which suggests that the chart instrument has moved so quickly relative to historical trading patterns that a pause or pullback may be necessary to allow bulls to catch their breath.
In the case of Grayscale Bitcoin Trust, the recent rally took its RSI to an extreme overbought level of 87.12 on Monday, before falling to 70.44 on Tuesday.
Monday’s RSI close was the highest ever for the ETF since it peaked at 88.01 on Dec. 18, 2017, when its price closed at a record high of $38.05. The fund plunged 89.9% over the next year, closing on December 14, 2018 at $3.84.
This seems discouraging for investors. But Frank Cappelleri, technical analyst at CappThesis LLC, said that instead of worrying about the last time the RSI was this high, he is more concerned about the “first time” the measure rose above 85 before the ETF reached its peak.
“And as is clear, the indicator exceeded 85 for the first time in November 2015, which means [the ETF] I still had two years before I reached the maximum,” Cappelleri wrote in a note to clients.
The first time was a close of 91.06 on November 14, 2015. While there were no closes above 85 in 2016, there were nine more in 2017 before the final reading on December 18.
If history is any guide, extreme overbought readings may not be that bearish.
FactSet, MarketWatch
Despite all these extreme overbought readings, the ETF is up 1,557.2% in 2017. This means that a chart tool’s ability to produce multiple overbought readings can be seen as a sign of underlying strength.
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Meanwhile, as Cappelleri pointed out, Monday’s extreme value was actually not the first in recent months. Grayscale Bitcoin Trust’s RSI closed at 85.03 on October 24, 2023 and at 86.25 on October 25. Despite Tuesday’s pullback, the fund is still up about 111% since then.
But before we take advantage of Tuesday’s sell-off to rally, there is a short-term bearish reversal pattern that appeared on Tuesday – known as “bearish engulfing” or “key reversal” – that warns bulls that they may need more time to make the move. refuel before making another push. higher.
Grayscale Bitcoin Trust opened at $58.45 on Monday, and traded in an intraday range of $58.39 to $60.70, before closing at a record high of $60.38.
On Tuesday, the ETF opened above Monday’s close at $60.41 and rose to an all-time intraday record of $61.99, before making a sharp reversal. It hit an intraday low of $55.01 before paring some losses to close at $55.23, below the previous session’s low.
A bearish engulfing pattern warns that the sell-off may last a little longer.
FactSet, MarketWatch
The pattern suggests that Monday and early Tuesday marked a buying climax, while Tuesday’s intraday reversal suggests the bears have launched a successful counterattack. And although this pattern is short-term in nature, its appearance after an extremely overbought reading could give it more credence.
Some downside levels to watch include the gap on the charts between the Feb. 27 intraday high of $51.45 and the Feb. 28 low of $52.70.
Many chart watchers believe that previous upward gaps on the charts define support zones on pullbacks – the idea is that those who sold before the stock rose would be happy to buy when given the opportunity.
There is another gap between the February 26 high of $49.06 and the February 27 low of $50.21.
GBTC’s potential support zones are below current levels.
FactSet, MarketWatch
And below that, previous areas of congestion often provide areas of support. The area bounded by the February 15 high of $47.26 and the February 21 low of $45.14 could be quite significant, as a decline in that area would suggest that a bear market has begun.
Many on Wall Street define a bear market as a decline of 20% or more from a significant peak. Starting with Grayscale Bitcoin Trust’s record close of $60.38 on Monday, a bear market would begin with a drop to $48.30 or lower.