Funds tracking Bitcoin just saw their largest single-day outflow ever.
More than $1 billion fled from Bitcoin spot ETFs last Tuesday. That was in the middle of a three-day drop that saw Bitcoin plunge nearly 15% last week.
The pendulum of investor emotions is on full display.
Crypto investors were riding high following the election in November. That pushed Bitcoin to record highs and saw meme coins like “Fartcoin” soar to over $2 billion in market value.
Then as much as $325 billion in crypto market cap was wiped out last week.
The good thing about this volatile price action is that it makes prime ground for traders to take advantage.
So far this year in my One Ticker Trader advisory, we’ve captured gains of 47% and 40% on iShares Bitcoin Trust ETF (IBIT) puts betting on Bitcoin downside. We’ve also made 42% with IBIT calls betting on the upside.
And I expect there are more opportunities in the making.
So let’s take a look at Bitcoin’s pullback and spot where the next big move could be developing…
Bitcoin’s Topping Pattern
The warning signs for Bitcoin’s pullback were building. Back in early February, I showed a repeating top pattern in Bitcoin’s price action.
I had this to say:
Pullbacks seem to come out of nowhere. But Bitcoin’s price action can often hint when there’s trouble ahead.
The key to spotting a potential decline is to look for topping patterns… combined with signs of sagging momentum.
After the election, Bitcoin rallied to the $106,000 price level in mid-December. After a brief dip, Bitcoin came back to test that level again in late January.
I warned:
As Bitcoin tested the peak again on January 21, the [Relative Strength Index (RSI)] made yet another lower high. That makes two consecutive lower highs in the RSI.
At the same time, a potential double-top is also in play (the red-shaded area).
The double-top pattern and RSI divergence look remarkably similar to what we saw last year before Bitcoin’s months-long slump.
A double-top pattern appeared in Bitcoin as the RSI was weakening. The RSI measures underlying price momentum.
Here’s an updated chart on how the pattern ultimately played out:
Alongside a falling RSI, Bitcoin fell below the 50-day moving average (MA, blue line).
It tested the 50-day MA several times and then broke down through price support at the $92,000 level (see “1”).
That’s when the sell-off picked up steam and sent crypto investors scrambling.
So here’s what I’m watching for next…
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Tracking Bitcoin’s Potential Path
Following last week’s plunge, signs suggest that Bitcoin’s drop is becoming overdone.
Take another look at the chart:
The RSI hit its most oversold level since August 2023 (circle).
Over the past year, Bitcoin has seen a short-term rally on three out of four occasions when the RSI got close to the 30 level (shown with the arrows).
There’s just one problem this time around… Bitcoin has yet to trade near meaningful price support. The best support level is currently around $73,000. That was the breakout following the election.
That means we need to be patient and let Bitcoin’s chart play out further.
But here are scenarios to watch for…
If Bitcoin does fall to support at $73,000, the case for a rebound would be strengthened by a rising RSI. That could present a buying opportunity.
On the other side, watch for a test of the 50-day MA if Bitcoin does rally.
In that scenario, look for the RSI to become overbought at 60. That level often serves as overbought during a downtrend.
So that could be a point of resistance where the rally faces a test.
Either way, Bitcoin’s volatility will offer us plenty of trading opportunities this year.
Staying adaptive and opportunistic is how to thrive no matter which direction Bitcoin ultimately takes.
And if you’d like to join me for my next trade recommendation, then you can find out how right here.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict