Bitcoin price plunged by nearly 10 percent after failing to sustain above $10,000.
The cryptocurrency has covered part of its recent losses, now trading above $9,100.
But a confluence of technical and fundamental catalysts are pointing to a deeper downside correction towards sub-$6K levels.
Bitcoin is trading above $9,100, up almost 3.5 percent on a 24-hour adjusted timeframe, as it attempts to erase its recent losses.
The benchmark cryptocurrency closed the previous week at nearly 10 percent in losses. The downside move appeared after it failed to break bullish above $10,000 – a short-term resistance level.
The price eventually crashed towards $8,700 earlier this week that followed a rebound back above $9,100.
Bitcoin’s price action hinted at a bias-conflict among traders. Their buying sentiment appeared weaker near the local tops above $9,500.
At the same time, they defended bitcoin’s support levels around $8,700, creating a modestly wide consolidation range with no preference for the next direction.
That leads analysts to look for hints in the old fractals. A combination of at least three crucial technical and fundamental factors predicts that the next move is extremely bearish, with downside targets lurking in the sub-$6,000 levels.
#1 Historical 30-40% Bitcoin Price Corrections
The first reason why bitcoin risks falling below $7,000 is its historical response to parabolic bull cycles.
Prominent analyst Josh Rager highlighted the fractal back in 2019 when the cryptocurrency was on its way to top near $14,000 in a wild upside rally.
He noted that Bitcoin typically logs a 30-40 percent pullback on average after its price explosions, mentioning eight of such moves in the cryptocurrency’s 11-year lifetime.
Source: Josh Rager
Mr. Rager was correct in predicting that bitcoin’s next pullback will come in either July or August 2019. The cryptocurrency did fall by more than 40 percent from its near-$14,000 top.
Similarly, its next parabolic move in between December 2019 and February 2020 also met with a similar but extended bearish correction of 60 percent.
It followed another explosive price rally from lows below $4,000 to highs above $10,000. Bitcoin broke out of the parabola on May 7, 2020.
BTCUSD breaks out of its third parabola in two years | Source: TradingView.com
The fractal now suggests at least a 30-40 percent price correction. That brings bitcoin’s medium-term downside target between $6,800 and $5,928.
#2 Downbeat S&P 500 Sentiment
Bitcoin’s bearish technicals have the backing of a macroeconomic sentiment.
The cryptocurrency risks correcting lower as its correlation with the S&P 500 index remains positive since March 2020. Catalysts that have driven both Bitcoin and the U.S. benchmark include the Federal Reserve’s open-ended stimulus program.
The U.S. central bank has committed to supporting its ailing economy with an unprecedented bond-buying program and by keeping interest rates to near zero.
That has pumped the S&P 500 despite the index’s weaker-than-expected corporate earnings and profits report. That makes the index riskier.
S&P 400 breaks above 200-day moving average | Source: TradingView.com
A fall in the stock market in February-March 2020 prompted a similar crash in the bitcoin market.
Observers noted that investors dumped their then-profitable bitcoin positions to either cover their margin calls, seek cash as safe-haven, or to offset their losses in a global market rout. Gold fell as well.
With the potential of another S&P 500 brewing, bitcoin risks extending its mid-$10,000 corrections to newer local lows.
#3 The Long-term Descending Trendline
Another fractal that is stopping Bitcoin from marking an extended bull rally is a long-term Descending Trendline.
Descending Trendline has behaved as resistance since December 2017 | Source: TradingView.com
The cryptocurrency has failed to maintain its bullish bias near the falling red line, as shown in the chart above. Each of the previous parabolic cycles exhausted near the level. Bitcoin’s recent price correction from $10,000 also started from the Trendline.
That has increased the probability of a deeper pullback. Meanwhile, a 200-day moving average (orange) has traditionally served as an accumulation area for traders. The wave is now dipping into the sub-$6,000 regions, as shown via the red bar.
It further indicates that bitcoin could test the $5,928-$6,800 area in the coming financial quarters.