The bitcoin-US dollar exchange rate fell below $4,000 on Tuesday,

extending losses in the overnight trade to hit a three-week low of $3,781. At press time, the cryptocurrency is trading at $3,844 levels, which amounts to a 25% drop from the record high of $5,000 hit on September 2. Perhaps more notably, month-on-month, the BTC is now trading dead flat for the first time in since June. Rumor has it bitcoin is feeling the pinch of speculation that the Chinese government is launching a crackdown on exchanges. A few others are blaming JP Morgan CEO Jamie Dimon's scathing attack on bitcoin for the meltdown in the prices seen today. But, while these events could factors, neither explain the current market activity.

News that China is planning to ban exchange trading has been in the air since Friday. Following a drop to $4,000 over the weekend, BTC regained poise as Chinese government kept mum on the issue. Experts dismissed the idea that an exchange ban would be long run negative for bitcoin as over-the-counter market will continue to flourish. Thus, bitcoin regained bid and moved to $4,350-4,380 levels in the first two days of the week. Meanwhile, JP Morgan CEO Jamie Dimon's negative comments on bitcoin are hardly surprising. Investment banks have always been critical of the cyrptocurrencies. Moreover, JP Morgan is not a crypto bigwig, thus Dimon's comments are a big hit across the wires, but would hardly matter to bitcoin traders.

Euphoria not reached

As we analyze the current markets, it’s important to remember bull markets are built  on fear and skepticism, while major market tops are the product of extreme euphoria. Most investment banks have been and still call bitcoin a “scam.” Every week, we see some stock market expert drawing parallels between the bitcoin rally and stock market bubbles seen over the last 100 years. Thus, despite the 416% year-to-date gains in bitcoin, it is safe to say that there are no signs of Euphoria. In fact, the first sign of bitcoin nearing a major top would be investment banks boarding the cryptocurrency freight train. More likely then is that what we’re seeing now is a technical pull back. Following a stupendous rally, investors are looking for reasons to take profit.

The chart above shows a bearish price RSI divergence on September 2 has been followed by:

• Symmetrical triangle breakdown
• Head and shoulders breakdown

The symmetrical triangle, which can also be referred to as a coil, usually forms during a trend as a continuation pattern. The pattern contains at least two lower highs and two higher lows. The “head and shoulders” is a reversal pattern that, when formed, signals a security (in this case bitcoin) is likely to move against the previous trend. The H&S neckline [line drawn from the left shoulder bottom and right shoulder bottom] support has been breached. A break below the neckline level has confirmed bullish-to-bearish trend reversal.

Scope for a drop to $3,000:
The H&S breakdown has opened doors for a sell-off to $3,000, which is the target as per the measured height method [difference between head and shoulder peak ($5,000) and neckline support ($4,000) is subtracted from the neckline support].

Corrective rally to be capped around $4,150 levels

The stochastic and the RSI are oversold, which is a condition in which the price of an underlying asset has fallen sharply due to market overreaction or panic selling. It is usually followed by a corrective rally. Thus, a brief correction to $4,150 [former neckline support will now act as a resistance] could be seen. Only a break above $4,400 [resistance offered by the trend line drawn from September 2 high and September 8 high] would revive the bullish view.

Chuck Reynolds

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