Bitcoin is on the verge of flashing the feared 'death cross' sell signal
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- Bitcoin is nearing a "death cross," signaling potential pain ahead for the crypto.
- A death cross occurs when an asset's 50-day moving average price falls below the 200-day average.
- Past death cross events have led to declines, but not all result in major downturns.
Bitcoin is about to flash the dreaded "death cross," a technical sell signal that suggests the cryptocurrency could see a stretch of losses ahead.
The technical sell signal occurs when the 50-day moving average price crosses below the 200-day moving average.
On Tuesday, the gap between the two moving averages was about $2,000, suggesting that the sell signal could flash in a matter of days.
The moving average crossover strategy can signal a reversal in a prior trend, suggesting that bitcoin's more than 20% post-election gains could completely unravel.
The last time bitcoin flashed a death cross signal was in August. The cryptocurrency went on to decline by as much as 16%, but quickly recovered to hit new records in November.
Moving average crossover strategies inherently operate on a lag and are therefore subject to head fakes, as was seen during the August death cross.
"While every major decline starts with a 'death cross' not every 'death cross' leads to a major decline," Ari Wald, head of technical analysis at Oppenheimer & Co., previously told BI.
So it remains to be seen if a coming death cross in bitcoin proves to be a reliable sell indicator.
However, Katie Stockton of Fairlead Strategies thinks investors should prepare for further downside, noting that the intermediate-term momentum signals lean bearish.
"We would use a short-term rebound to reduce exposure since bitcoin now has a decisive long-term overbought downturn to suggest a corrective phase is likely to become prolonged," Stockton told clients in a note on Tuesday.
Stockton expects bitcoin to test support at $73,800, representing potential downside of 13% from current levels.