Cointelegraph, a media outlet that has a lot of experience in the analysis and media, recently identified indicators suggesting that the Bitcoin price rally may be too long.
John Bollinger, creator of Bollinger Bands, has a bearish view. He suggests traders use a trailing stop as signs that a “top”, or a rise, are building up.
It is important to note that Bollinger Bands and Fear and Greed are backward-looking indicators. These will flash above-bought levels when there is a 30% weekly rally such as the latest one.
TechDev_52, a crypto analyst, correctly asked if there is a way to tell if we are entering a correction or continuation of the rally.
You now know why they call it “a bear trap”. It is convincing. How can you tell the “trap” from “peak?” Both are round, but one is pointy. What does this look like? $BTC pic.twitter.com/aumWqaMsut
— TechDev (@TechDev_52) May 16, 2021
Popular YouTuber and trader Nebraskangooner shows that the $56,000 recent top may have been an upper range for a bullish channel, which has been guiding Bitcoin since July.
The #Bitcoin OBV is improving but hasn’t yet broken out. The channel is at the top. I would love to see bullish consolidation at range high leading to OBV breakout w/ price breakout to mega bullish continuation. https://t.co/btm5aW7WTW pic.twitter.com/kPqwOSMgE1
— NebraskanGooner (@nebraskangooner) October 6, 2021
“Greed mode” can last weeks or even months
Referring back to the Fear and Greed indicator: Below are examples of how such a metric could sustain overbought levels longer than three to four weeks.
Bitcoin ‘Fear & Greed” index (above) & Bitcoin price at Bitstamp. (below). Source: btctools.io, TradingView
You can see that the Bitcoin Fear and Greed indicator was above 65 from Jan. 29 through Feb. 26, which indicates traders were too confident.
This metric takes into account trading volume, futures interest, search data, and social metrics to determine how hyped the market really is.
It took 4 weeks for a significant Bitcoin price correction to occur after the warning sign flashed. The 70% rally that ensued was missed by those who sold within the first days of the indicator flashing.
Similar patterns were observed between July 23rd and August 25, but the Bitcoin price continued its upward trend. A correction will always occur at some point. But how many weeks or even months later?
Bollinger Bands are a short-term indicator that is very useful
John Bollinger, a well-respected and experienced trader, uses the moving average plus some deviations based on current volatility as his indicator. A 30% weekly move would be out of this range most of time due to Bitcoin’s 4.5% volatility.
Bitcoin price at Coinbase using 20 day Bolling Bands Source: TradingView
Although a minor correction is likely to occur when Bitcoin breaks through the upper Bollinger Band, it has absolutely no correlation with the price for the next two to four weeks.
The funding rate was neutral
The funding rate is a fee that derivatives exchanges charge to offset the risk between buyers and sellers as their leverage differs. The indicator rises when there is a buying frenzy.
Rate of funding bitcoin 8-hour permutual futures. Source: Bybt.com
It is not unusual for the current average rate of 0.04% per 8-hour to be 0.8% per week. It was above 1.5% per semaine for a whole month in December 2020 and again in February 2021.
This metric is similar to the Fear and Greed indicator. It shows buyers that they are becoming overconfident when it exceeds 0.10% every 8 hours, but not necessarily alarming.
If buyers believe the rally will continue, a 1.5% to 3% weekly fee won’t force them into closing leverage longs. If there is a Bitcoin shortage, holders might have the option to buy Bitcoins at $80,000 or more.
A crash is possible if bearish events happen in the near future. These include a denial of exchange-traded funds requests or a strict U.S. ban against stablecoins. Bitcoin will not surpass the all-time peak in such an event and these backward-looking metrics “work” finally.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.