Bitcoin (BTC) has seen a very volatile week, as the price of Bitcoin jumped around from $32,000 to $38,500 and back toward $33,000 in a matter of 24 hours.
The initial spike to $38,500 happened in minutes after Elon Musk added #Bitcoin to his Twitter profile.
However, no follow-up of that price movement was seen on the charts as Bitcoin dropped substantially in the following hours. Currently, the $34,500 area is a significant resistance zone to break through if the market wants to sustain the bullish momentum.
Failure to break $38,000 causing dropdown
XBT/USD 4-hour chart. Source: TradingView
The levels that are critical to watch are highlighted in the chart above. Simply put, $38,000 must break for the rally to continue. Flipping this level for support opens the door to new all-time highs.
However, the surge couldn’t be sustained yesterday. After the $38,000 level’s failure, the $34,000 level couldn’t provide the heavily needed support for further upward momentum.
Therefore, the “Elon Musk pump” can be considered an outlier, and the general trend continues. This is a downtrend since the peak high at $42,000 that most likely will continue unless Bitcoin’s price can break through $34,500 and flip it into support.
Dollar showing strength is bad news for Bitcoin
U.S. Dollar Currency Index 1-day chart. Source: TradingView
One of the primary arguments for more Bitcoin downside would be the recovering U.S. Dollar Currency Index (DXY). This index shows a potential bottoming formation as a bullish divergence is seen at the significant 90-point level.
After this, the bullish divergence will be confirmed through a higher low, indicating that more upside is likely.
Remarkably, the previous relief rally on the DXY Index in September caused a 20% correction for Bitcoin. However, since that relief rally, the DXY Index has shown massive weakness, one of the significant variables for the enormous increase of Bitcoin’s price to $42,000.
However, February isn’t the best month for equities. The same can be concluded about Bitcoin, as February 2018 was when Bitcoin crashed to $6,000 after hitting its previous all-time high.
Therefore, a rebounding DXY could add to the bearish sentiment for Bitcoin in February as well.
Bitcoin Dominance Index eyes relief rally
BTC Dominance 1-week chart. Source: TradingView
Historical charts show previous market behavior with many patterns being cyclical.
When Bitcoin’s dominance topped out in December, massive surges were seen across the altcoin market. However, after such an enormous rally, a healthy correction would not come as a surprise to test previous resistance levels.
Those tests would mean a bounce for Bitcoin dominance in February, which may open the door for a huge run for the entire crypto market from March onwards.
Critical levels to watch for Bitcoin
XBT/USD 3-hour chart. Source: TradingView
The critical levels to watch are easy to see in the chart above. First, Bitcoin’s price has to reclaim the $34,500 level as support to sustain bullish momentum. If that happens, the level at $38,000 will be retested. Most likely, that test will result in a breakout above $38,000 toward the all-time high.
However, if Bitcoin’s price can’t break through $34,500, further downward momentum is likely, as the chart shows. In that perspective, the critical level to watch is the $30,000 region. If that fails to sustain support (after numerous tests already), I expect a drop toward $25,000 and the 21-Week MA.
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