One of the most popular technical analysis indicators, the RSI has broken decisively out of its more than 6-month downtrend line. A review of similar cases from the previous 3 years allows us to estimate the potential for the Bitcoin
(BTC) price to rise in the coming months. Sponsored Sponsored
The following article explains what the RSI is and how important the breakout that occurred last week was. It then analyzes previous situations in which the indicator broke out of a long-term trend and shows that each time it led to a significant rise in the price of Bitcoin. Then, by averaging the historical results and extrapolating the results to the current valuation of BTC, we get a hypothetical target for Bitcoin’s rise at $85,487.
What is the RSI?
The Relative Strength Index (RSI) is one of the most popular
momentum oscillators in technical analysis. It measures the magnitude of price changes in relation to previous gains or losses. Its visual equivalent is a line chart that moves in the range of 0-100.Sponsored Sponsored
The standard interpretation of the RSI is to estimate the overbought (above 70) or oversold (below 30) level of an asset. In the first case we get a bearish signal, in the second a bullish signal. The creator of the indicator is J. Welles Wilder Jr. who explained its use in a book from 1978
Usually the RSI is calculated on the basis of 14 preceding periods (e.g. 14 weeks, 14 days or 14 2-hour periods). Throughout the following article we refer to the RSI on the daily interval.
breaks out of 6-month trendline
A few days ago, the RSI indicator for Bitcoin broke through the long-term downtrend line it had been below since January 8, 2021. The index value was 89 at the time and this was the highest reading in over 3 years when the index recorded a level of 94 at the peak of the previous bull market in December 2017.
On the RSI chart, we see a descending trendline (blue) that was in place during the setting of a new all-time high (ATH) at $64,895 on April 14. The line was also further in force during the May declines and the subsequent consolidation in the $28,600 – $41,300 range.
<img src=”https://s33064.pcdn.co/wp-content/uploads/2021/07/1_BTC_RSI_wyckoff_distribution_accumulation.png 1828w, https://s33064.pcdn.co/wp-content/uploads/2021/07/1_BTC_RSI_wyckoff_distribution_accumulation-300×148.png 300w, https://s33064.pcdn.co/wp-content/uploads/2021/07/1_BTC_RSI_wyckoff_distribution_accumulation-1024×505.png 1024w, https://s33064.pcdn.co/wp-content/uploads/2021/07/1_BTC_RSI_wyckoff_distribution_accumulation-768×379.png 768w, https://s33064.pcdn.co/wp-content/uploads/2021/07/1_BTC_RSI_wyckoff_distribution_accumulation-1536×757.png 1536w” alt=”RSI breakout after 6-month downtrend” width=”1828″ height=”901″/>BTC chartvia Tradingview
In total, the downtrend line has been tested 8 times over a 6-month period (194 days). However, since July 21, we have seen a strong breakout (green arrow).
Today the indicator records a value of 66 and is at its highest since April 16, just after Bitcoin established ATH. The Bitcoin price chart is following the bullish signal from the RSI as it has just regained the support area at $38,000
Historical RSI Breakouts vs. BTC
To understand what the long-term significance of an ongoing breakout on the RSI might be, it is useful to look at similar situations from historical BTC price action. We will look at a few examples of breakouts following several months of downtrends on the RSI and correlated uptrends on Bitcoin over the last 3 years.
The last time the RSI was in a clear downtrend was from August 1 to September 23, 2020. The indicator broke out of the trendline (blue), followed by a bullish re-test (green circle) and rose to the aforementioned 89 level on January 8, 2021.
During this time, Bitcoin’s price rose 317% from the $10,138 level to a peak at $42,000. Meanwhile, BTC broke through the historical ATH of 2017 at $20,000
Reaching back to the end of the last bull market we find 4 more instances of RSI breaking out above the long-term downtrend line:
- February 8, 2019, when the RSI broke out of 14-month lows (426 days). The breakout saw the BTC price rise 320% from $3337 to a peak at $13,880 on June 26, 2019.
- On January 3, 2020, the RSI was in a downtrend for over 6 months (193 days) from the aforementioned peak. Bitcoin rose 53% after this breakout, from $6853 to a peak at $10,495, followed by a coronaviral crash.
- On March 19, 2020, after the RSI indicator bottomed at 15 severala days earlier. BTC then rose 103% in just 74 days, from a high of $526 to $10,429 on June 1, 2020.
- July 20, 2020, when the RSI broke out after a 2.5-month downtrend (75 days). The breakout led to a 37% increase in the BTC price, from $9128 to a peak at $12,473 on August 17, 2020.
Summary: 166% gain for BTC
In conclusion, one may be tempted to average the amount of increases in the price of Bitcoin, which always followed the breakout of the RSI indicator from the long-term downtrend. The average of all 5 increases discussed above (320%, 53%, 103%, 37% and 317%) is 166%.
Using a simple extrapolation of this average to the price of Bitcoin at the time of the current RSI breakout from the downtrend, we can estimate a hypothetical uptrend target. The close of the daily candle on July 21, 2021 was at $32,138. Increasing this value by 166% we get the BTC target at $85,487.
Of course, this is not a technical target by any means, but merely a calculation of the averaged upside of Bitcoin’s price after its Relative Strength Index broke out of its long-term downtrend.
For a previous analysis of Bitcoin (BTC) by BeInCrypto, click here.
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