Why Bitcoin’s ‘Death Cross’ May Be a Bear Trap
Originally published on: CoinDesk
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March 28, 2018
Bitcoin risks entering a technical “death cross” soon, but the bearish signal will likely not be as severe as has been made out in reports.
A death cross occurs when the 50-day moving average (MA) cuts the 200-day MA from above (bearish crossover), indicating a long-term bear market going forward. As seen on the bitcoin daily chart below, the 50-day MA looks set to dip below the 200-day MA imminently.
Some strategists are saying that the death cross could yield a big sell-off in BTC, possibly to as low as $2,800, a level last seen in September 2017. However, such fears are likely overstated, as the crossover tends to work as a contrarian indicator – that is, they tend to occur at the end of a big bear move, with prices rallying soon after.
Further, it takes a great amount of effort on the part of the bears to push the 50-day MA below the 200-day MA. For instance, BTC turned lower from the $20,000 mark in mid-December when the 50-day MA was still rising.
The moving average adopted a bearish bias (began sloping downwards towards the 200-day MA) after BTC fell to $6,000 on Feb. 6. Since then, BTC has created lower highs (bearish setup) around $11,700 (March 5 high) and $9,177 (March 21 high) and the 50-day MA has slowly closed-in on the 200-day MA.
To cut a long story short, BTC had to drop by $14,000 (from $20,000 to $6,000) to push the 50-day MA so far towards the 200-day MA. Hence, it’s likely that the bears will run out of steam by the time the actual death cross occurs.
In fact, it could end up being a bear trap, at least in the short term. And the historical data seems to support the argument, as explained below.
- BTC bottomed out at $340 (April 11, 2014) immediately after death crosses were confirmed (see hand icons on chart) and had rallied to $680 by June 2014. Note, the RSI showed oversold conditions when the death cross happened, hinting at the rally to come.
- Another more severe death cross occurred in early September 2014 and, by January 2015, bitcoin had dropped more than 65 percent to $170. Back then, the RSI was bear biased and holding well above the oversold territory.
- Meanwhile, the death cross seen in mid-September 2015 was a big failure. BTC had already bottomed out at $162 in mid-August and continued to rise after confirmation of the cross signal.
So, the death cross failed to yield a big sell-off in two out of the last three events, and the odds are high that it would end up being a bear trap for the third time.
As of writing, BTC is changing hands at $8,050 on Bitfinex. Having failed to beat the resistance around $9,000, the cryptocurrency now looks set to revisit the recent low of $7,240 – a move that would most likely confirm the death cross, but could also push the relative strength index (RSI) near the historical bull reversal zone of 30.00-27.00.
A move to $7,240 (recent low) will likely confirm the death cross and may yield further drop towards $6,600. That said, the support will likely hold, with the daily RSI likely to show oversold conditions by then. In the subsequent days, bitcoin may trap th bears on the wrong side of the trade, as seen in April 2014 and September 2015.
However, if BTC finds acceptance below $6,600, a further sell-off to sub-$6,000 levels cannot be ruled out.
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