Why You Should Be Wary of Bitcoin’s Latest Rally

By Larry Benedict, editor, Trading With Larry Benedict

Positive crypto catalysts keep piling up.

A crypto-friendly administration in Washington, explosive meme coin action, ETFs opening the door to institutional investors, a favorable seasonal period…

Everything seems to be going crypto’s way at the moment.

But before the positive headlines get you all bulled up, you should take a breather. Because we need to be wary of complacency setting in.

It may seem like cryptocurrencies can only go higher. But Bitcoin, for example, is over four times more volatile than the stock market.

That means even extremely bullish years can see outsized drawdowns.

And a quick Bitcoin chart check shows the growing potential for a pullback.

Here’s what to look for… and why you should be cautious right now…

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Conditions for a Pullback

Even during its most impressive bull market gains, Bitcoin can suffer serious drawdowns.

Bullish years like 2023 and 2024 saw Bitcoin gain 153% and 123%, respectively. Yet there was a 20% drawdown in 2023 and a 28% drawdown in 2024.

Pullbacks seem to come out of nowhere. But Bitcoin’s price action can often hint when there’s trouble ahead.

The key to spotting a potential decline is to look for topping patterns… combined with signs of sagging momentum.

Last year offers a great example. Take a look below:

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Bitcoin’s top in early 2024 happened at the $73,000 level in March (the arrow). But heading into that top, there was a growing momentum divergence.

The Relative Strength Index (RSI) in the bottom panel made a lower high heading into the peak.

After chopping sideways, Bitcoin came back to test a level near the highs. At the same time, the RSI made another lower high.

That showed a double-top chart pattern, which you can see in the shaded box.

That marked the high in Bitcoin prices for the next eight months. It went on to fall as much as 28%.

With that setup in mind, let’s look at Bitcoin’s recent price action…

A Repeating Pattern

Bitcoin’s last big drawdown ended with Trump’s election win and his crypto-friendly policies coming to Washington.

Bitcoin jumped to a new all-time high the day after the election. It went on a 53% run that lasted into mid-December, when it topped out at just over $106,000.

From there, Bitcoin dropped to test the 50-day moving average (the blue line; see “1” in the chart).

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That served as an area of price support and sent Bitcoin right back to the prior highs.

But evidence is growing that Bitcoin is running out of steam.

For example, the RSI made its high on November 22. Bitcoin rallied further from there, but the RSI made a lower high.

As Bitcoin tested the peak again on January 21, the RSI made yet another lower high. That makes two consecutive lower highs in the RSI.

At the same time, a potential double-top is also in play (the red-shaded area).

The double-top pattern and RSI divergence look remarkably similar to what we saw last year before Bitcoin’s months-long slump.

There’s no guarantee of a similar outcome.

But at the very least, it’s worth staying cautious at a time when Bitcoin’s rally is standing on spindly support.

Happy Trading,

Larry Benedict
Editor, Trading With Larry Benedict

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