Bitcoin is down but not out, with prices holding above key support near $9,400. However, if that level is breached, more chart-driven selling may be on the cards.
The top cryptocurrency by market value is currently trading around $9,560, representing a nearly 2 percent drop on the day, according to CoinDesk’s Bitcoin Price Index.
Prices fell from $10,000 to $9,500 on Monday, engulfing the preceding day’s price gain. The drop came as stocks collapsed and classic safe-haven assets rallied on the coronavirus scare. Notably, the Dow Jones Industrial Average fell by over 1,000 points, while gold rose to $1,676 per ounce – the highest level since February 2013.
With bitcoin failing to post gains during the risk-off tone in the financial markets, the popular narrative that the cryptocurrency is a haven asset has weakened. Prices rallied by 30 percent last month amid the US-Iran tensions and the coronavirus outbreak in China, convincing the analyst community of its strengthening safe-haven appeal.
With Monday’s drop, bitcoin has also formed a head-and-shoulders pattern on technical charts, as seen below.
The head-and-shoulders pattern is a sign of a bearish reversal. A drop below the neckline support marks a transition from a bullish higher-lows, higher-highs setup to bearish lower highs and lower lows.
At press time, the neckline support is seen at $9,400. Acceptance under that level would confirm a breakdown and create room for a deeper decline to $8,300 (target as per the measured move method).
Seasoned traders would argue that head-and-shoulders breakdown often traps sellers on the wrong side of the market. While that can be true, its effects depend on context. If the pattern appears following a notable price rally or at multi-month highs, as is the case here, the breakdown tends to cause more sellers to join the market, keeping prices low.
That said, a post-breakdown sell-off, if any, could be cut short near the crucial support levels lined up at $9,188 – bitcoin had turned lower from that level on Jan. 19 – and the higher low of $9,075 created on Feb. 4.
Sellers failed to keep prices below $9,500 during the early European trading hours. Moreover, dips below that level have been consistently short-lived since Feb. 19.
If that level continues to restrict losses during the U.S. hours, some buying pressure may emerge to lift prices back to $9,750-$9,800. The outlook, however, would turn bullish only if prices rise above $10,128, as discussed Monday.
Disclosure: The author holds no cryptocurrency at the time of writing
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