Bitcoin (BTC) could be in for a stronger recovery rally in the next few days, having found a temporary bottom near $4,000.
The leading cryptocurrency, which hit a 14-month low of $4,048 on Bitstamp yesterday, is now trading at $4,580, representing a 2 percent gain on a 24-hour basis.
The $500 recovery seen yesterday indicates that the market is finally paying heed to the record oversold levels reported by the 14-day relative strength index (RSI). Currently, the indicator is still hovering in oversold territory below 30.00. As a result, BTC is unlikely to revisit yesterday’s low of $4,048 for now.
Further, the correction looks set to gather pace, as the RSI on the 3-day chart has dropped into the oversold region for the first time since January 2015.
Oversold readings on the RSI tend to put a bid under the cryptocurrency, historical charts show.
For instance, BTC bottomed out at $275 in the first week of October 2014 – with the sell-off looking overdone as per the RSI – and rose to highs above $400 in the next few days.
On similar lines, the oversold conditions signaled by the RSI in January 2015 likely triggered a recovery rally, pushing prices above $300 by mid-month.
As of writing, the RSI is hovering well below 30.00. Therefore, the cryptocurrency looks due for a break above $5,000.
4-hour chart and hourly chart
The bullish RSI divergence, seen on both the hourly and 4-hour charts, also indicates the recent sell-off has likely run out of steam near $4,000 and a relief rally could be in the offing.
On the daily, the primary trend remains bearish, as the 5- and 10-day exponential moving averages (EMAs) are sloping downwards. These averages, currently at $4,854 and $5,242, respectively, could cap any corrective rally.
- Bitcoin could rise above $5,000 in the next few days, as per the oversold RSI on the 3-day chart.
- The overall bearish outlook would be invalidated if the corrective bounce ends up pushing prices well above the 10-day EMA of $5,242.
- The sell-off would resume if BTC finds acceptance below the 200-week EMA of $4,182, opening the doors for a drop below the psychological level of $4,000.
Disclosure: The author holds no cryptocurrency assets at the time of writing.
Bitcoin image via Shutterstock; Charts by Trading View