What has been a consistent and healthy rally up to the $717.99 local high over the past few weeks, has finally hit a wall. While many tops come on bearish news or fundamentals, this one was almost purely technical in our opinion.
Two weekends ago we mentioned that the action over those two days would determine the flow of funds into the market until the end of the month and indeed that is precisely what has materialized. What were overbought conditions last week, turned out to be signs of strength as a continuation to the upside broke not only the key $700 level, but also tested the upper bounds of a strong resistance area around $720. Then, following that $717.99 local high on BitStamp on bearish momentum and volume divergences, the market failed to break back above there thus leading to a fairly significant dump which took price below the $700 mark and broke near term market structure. Now price is currently just above there, waiting for a catalyst one way or the other. For the time being we are still leaning towards a downside and we would be buyers of that dip if it can make it into one of our new buy zones.
Moving on the all-important technicals, we can see on the daily chart below that price is still at the upper end of the medium term OTE short zone and is outside of the volume profile value area, all on very overbought momentum indicators. Willy is officially in overbought territory, RSI has dipped back below there but remains extended, and MACD has already rolled over. Additionally, price is now testing the near term EMA’s for support while the 200-day SMA tries to turn to the upside. However, notice how far above there we currently are. A move back down into the low to mid-$600’s would fill in some volume profile notches, recharge momentum, and test the 200 SMA and lower trendline.
Having said that, overbought momentum indications have been a sign of strength recently rather than a predictor of pullbacks, which is why we want to remain cautious in this area on both sides of the market. Notice that price is still awfully close to the intermediate term supply area, and still far above the pivot and demand areas, which is why we think it will remain tough to get through this $720 – 730 resistance patch before some kind of reset lower. Regardless, we think the market is generally heading higher over the course of the rest of this year.
Last week we mentioned that it could take a month or more to get to and break above the old $778.85 regional high from June, although this week we think that may be a bit liberal. The market seems to be saying that it wants to continue higher in the coming weeks which would put the $780 area in our sights sooner than expected. The major question is how big of a correction we get prior to the start of that upside continuation, mainly because we want to be buyers near the eventual lows. We think it will be relatively shallow, but we also think it’s not quite over yet.
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