BTC Correction Rattles Traders
Bitcoin often corrects by 30-40% in a bull market. Is this time any different?
In the early hours of Monday morning, right after the weekly candle closed, BTC dropped sharply, losing over $3,000 within a couple of hours. Following a brief bounce, it then corrected again, dropping as low as $40,000: A 10% fall from the top.
So, what's going on, and is there any cause for concern?
Volatility Is Standard
By bitcoin's normal standards, this was no big deal. Bitcoin can regularly crash 20-40% in a bull market. Nonetheless, as the first significant correction following a stellar run-up, it was cause for concern among some traders.
Bitcoin's relative strength index, a key momentum indicator, fell back into oversold territory on the 4h chart for the first time in four weeks. An RSI reading of 70 or above indicates overbought conditions. Below 30 shows oversold.
On the daily timeframe, it dipped to 57, relatively neutral territory. On the weekly timeframe, BTC is still well above 70.
All of this suggests that, at the very least, bitcoin is due to take a breather in the short term. On the medium-term timeframe, further falls are certainly possible. However, history shows us not only that huge crashes can happen, but that bitcoin can remain overbought on the weekly timeframe for many weeks or even months.
Additional information is therefore needed to make an informed decision.
Open Interest Resets
Open interest—the amount of money in options contracts—was smashed by the move. The speed and depth of the fall in price meant that around $300 million in longs were liquidated. Once these longs have been cleared out, it reduces the chance for further falls, since there's less money on the table to be taken, and less scope for the kind of cascading margin calls that can happen when heavily-leveraged traders are caught unawares.
When To Worry?
We may already have seen the local low, at $40k. If not, and bitcoin continues to decline in the days and potentially weeks ahead, at what point would there be cause for concern?
A 30% correction (nothing out of the ordinary) would take bitcoin from its recent peak just below $45,000 back to the $30-32k level. This is a key zone that has seen significant activity over the past three years, which is why it acted as such strong resistance until the recent breakout. Additionally, both the 200-week simple moving average and 200-day moving average are located around this area. At this point, $30,000—in the worst case scenario—should prove strong support. If that cracks, it indicates that something is very wrong. Given the current bullish narrative, that would probably be because something fundamental has changed (for example, the SEC denying the ETF applications).
$36,000, which is the 38% fib level and a previous area of consolidation, would be a natural first stop. That would represent a 20% fall from the local top.
Tuesday's US CPI figures and Wednesday's interest rate decision by the Fed will prompt additional volatility, though if the data is favorable then that will be to the upside. If CPI comes in hot today, then it's possible it would catalyze another leg down for BTC.
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