If you've been reading my articles here at INO.com, I don't have to tell you that I lean on fundamental analysis when I talk about crypto.
You've also noticed that I don't hesitate to pull out a chart and do some technical analysis.
That's why today, we're going to use some technical analysis to explore a chart pattern that I've used for a long time and that all of a sudden popped up on my screen when I was in the midst of my routine studies of Bitcoin (BTC).
But before we get to that dynamite chart pattern, let's look at the difference between fundamental and technical analysis.
What's Fundamental And Technical Analysis?
Fundamental analysis looks at what an asset does, what its markets are, how it makes money. By looking at these features, fundamental analysis can provide opportunities for investors. And the assets that you can target with fundamental analysis can be pretty much anything, from a stock to a bond or a cryptocurrency.
Technical analysis, on the other hand, focuses on price and related price patterns. By studying these price movements and patterns, primarily using charts, technical analysis can also provide opportunities for investors. And like fundamental analysis, technical analysis can target just about any asset.
To most people, including investors, when they think about assets as investments, they focus on fundamental features. What does the company make? What does this crypto do? When will this bond mature? And if you think about it, these kinds of fundamental questions are intuitive.
Just as intuitive is technical analysis; in fact, when you start talking about an asset, especially crypto, one of the first features that people focus on is the Holy Grail of technical analysis: Price. What is its current price? What is its historical price? Where is its price headed? All these questions are in the realm of technical analysis.
So which analysis method is better? Of course, you have disciples of both methods that believe their way is the only way.
But through my experience as a stockbroker, accountant, and financial analyst, I can tell you that the best investors I've run across usually deploy a mixture of fundamental and technical analysis when they go around looking for investments. Of course, they want to know what an asset does and how it makes money. But they also want to know what's happening to its price.
For me, I'm certainly a member of that club.
And it seems to me to be reasonable. After all, even if you only cared about fundamentals, you wouldn't avoid an asset's price behavior. And if you only cared about technicals, you wouldn't ignore how an asset does and how it fits into its markets.
RSI Says BTC Will Likely Move Higher
Ok, so here's that dynamite Bitcoin (BTC) chart pattern that I was telling you about:
This is a chart of BTC over the past year. Focus on the second chart in the lower pane. This is a chart of the Relative Strength Index or RSI. The RSI is a momentum oscillator that tells you how much an asset's price is changing and how rapidly it's doing so. While the math is straightforward, I'll spare you the details. The RSI was developed in 1978, and J. Welles Wilder is one of the most widely used technical indicators.
So, how do we use RSI?
When an asset's price rises toward 70, it is considered "overbought" and might be looking to go lower. So, you could use this information to trim your position if you own the asset or to short the asset if you wanted to play the downside.
When an asset's price falls toward 30, it is considered "oversold" and might be looking to go higher. So, you could use this information to increase your position if you own the asset or to buy the asset if you want to play the upside.
What is RSI telling us about BTC? In a nutshell, that BTC is probably headed higher. Here's what I mean:
Look at what's happened to BTC following some recent oversold conditions in July and September of last year. In both cases, indicated on the chart by the two farthest left vertical blue lines, when RSI approached 30, BTC reversed its downtrend and went higher, indicated by the red ellipses. And in the case of the September reversal, BTC went on to print all-time highs.
And when I mean reversals, I'm not talking about chicken feed. Following the July reversal, Bitcoin (BTC) climbed a staggering 77% to $52,634 in early September. Likewise, following the September reversal, BTC climbed 62% to $65,993 in October, a new all-time high.
Now, before you go out and anoint RSI as the indicator of all indicators, remember that just like any technical indicator, it has its limits. And one of the biggest is that RSI may remain overbought or oversold for long periods of time, especially when an asset is showing a strong trend. That, in turn, could mean a lack of any reliable signals, potentially translating to missed opportunities.
But all told, RSI is telling us something significant here. But remember, if you're getting involved with crypto, devote only 1% to 2% of your portfolio.
Disclosure: This contributor may own cryptocurrencies mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.