Expert analysts and media outlets, including Cointelegraph, recently pointed out that some suggested an overheated rally for the price of Bitcoin (BTC).
Among these bearish prospects is the one described by John Bollinger, the creator of the Bollinger Bands who urged traders to use a trailing stop as the “high” signals began to build up.
However, it should be noted that the Bollinger Bands and the Fear and Greed indicator are retrograde parameters. As a result, they usually show overbought levels following a 30% weekly rally, such as the one seen recently.
Crypto analyst TechDev_52 claimed that there is no way to know if the price is approaching a potential big correction or a continuation of the rally:
“Now you understand why they call it ‘bear trap’. It is really convincing. How do you distinguish the ‘trap’ from the ‘peak’? One is rounded, the other is pointed. Which one do you think between the two? “
For example, well-known YouTuber and trader Nebraskangooner shows that the recent high of $ 56,000 could represent the upper range of a bullish channel that has been driving Bitcoin since late July:
“OBV is growing but the breakout has not yet come. It has reached the upper limit of the channel. I want to see bullish consolidation at the top of the range followed by an OBV and price breakout for an ultra-bullish continuation. “
The greed phase can last for weeks or months
Returning to the Fear and Greed indicator, the following examples show that this metric can maintain overbought levels for more than three to four weeks.
Between January 29 and February 26, Bitcoin’s Fear and Greed indicator remained above 65, suggesting that traders were too confident.
The metric uses trading volume, futures open interest, social media data and search results to calculate the extent of hype in the market. Hence, it took four weeks for a Bitcoin price correction to begin. Those who sold in the first few days following the indicator’s warning signal missed a 70% rally.
A similar pattern occurred between July 23 and August 25, as the price of Bitcoin continued its rise. Yes, a correction will always come at some point, but after how many weeks or months?
The Bollinger Bands, a very good short-term indicator
John Bollinger is an experienced and respected trader, but his indicator consists of a moving average associated with the deviation based on the current volatility. In short, a 30% move within a week will break out of this range in most cases, considering Bitcoin’s average daily volatility is 4.5%.
Undoubtedly, when Bitcoin breaks out of the upper Bollinger band it tends to track a slight correction later on, but this has no correlation with the price between two and four weeks earlier.
The funding rate remains neutral
Finally, it is appropriate to analyze the funding rate, a commission applied by derivative exchanges to balance the risk between long (buyers) and short (sellers) for changes in their leverage. Obviously, when the market sees strong buying pressure, the indicator goes up.
The current 8-hour average rate of 0.04%, or 0.8% per week, is nothing unusual. In December 2020, for example, it remained above 1.5% weekly for a full month, and again in February 2021.
Similarly to the Fear and Greed indicator, when this metric exceeds 0.10% at 8 hours it suggests that buyers are becoming too confident, but it does not necessarily represent an alarming level.
As long as buyers are convinced that the rally will continue, paying 1.5% or even 3% every week will not force them to close leveraged longs. For example, if a crisis in the supply of Bitcoin on exchanges caused the recent rally to $ 56,000 as investors continue to accumulate, the price could soar to $ 80,000 or higher.
However, we can expect a collapse in the event of bearish events in the near future, such as rejected exchange-traded fund requests or some ban on stablecoins in the US. In that case, Bitcoin will not surpass its all-time highs, and these retrograde metrics will finally “work.”
The ideas and opinions expressed in this article belong solely to theauthor and do not necessarily reflect Cointelegraph’s views. Every investment and trading operation involves risk. You should conduct your own research when making a decision.