2 Key Metrics Hint at Big Dip Before Next Bull Market
Many analysts counter trade the signals provided by the indicator. In other words, deeply bearish readings signal that it is time to buy Bitcoin whereas overly bullish readings suggest that it is time to sell.
MVRV Z-Score. Source: lookintobitcoin.com
The MVRV Z-Score also provides valuable insight into Bitcoin’s current price action. According to market analyst Philip Swift, the indicator can be used to identify periods where Bitcoin is over and undervalued “relative to its fair value”.
Swift further explains that:
“The MVRV Z-score has historically been very effective in identifying periods where market value is moving unusually high above realized value. These periods are highlighted by the z-score (red line) entering the pink box and indicate the top of market cycles. It has been able to pick the market high of each cycle to within two weeks.”
The indicator also signals when the market is significantly below the realized value and this can be observed when the Z-score enters the green box.
Readers will notice that each strong parabolic rally was followed by the market cap (blue line) dropping below the realized value (orange line) for a prolonged period of time. A strong rally typically kicks off once the market cap crosses above the realized value as seen in January 2012, November 2015, and most recently, in April 2019.
Currently, the market cap is drawing closer to a cross with the realized value and the Z-score is dropping closer to 0 (the green box).
Bitcoin NVT-Signal. Source: woodbull.com
Willy Woo’s Bitcoin NVT Signal also shows Bitcoin’s price dropping closer to its realized value at $5,591 and the NVT signal is currently at 64.6 with 45 representing oversold conditions.
All of this suggests that Bitcoin still has more bearish days ahead but the macro view of the digital asset’s price action remains encouraging, or perhaps one should say “exciting.”
The 4-hour to weekly timeframe shows a bearish bias and the bounce of the crucial support at $6,400 failed to produce a trend reversal. In fact, at the time of writing, Bitcoin seems likely to again retest the lower support of the long-term descending channel.
Retests of $6,800, $6,400 and $6,300 are only going to hold so many times; and with longs increasing at each retest, it’s possible that buyers will dry up, giving bears the opportunity to push the price to the $5,350 to $4,900 zone.
A drop to these levels would likely push the market cap below the realized value and the Z-score and NVT signal into oversold territory. If past performance can in any way be interpreted as precedent, one would then surmise that this event would precede the commencement of a trend reversal and a new strong market rally.
Of course, all of this can be averted and the entire bearish analysis nullified if Bitcoin can sustain above $7,600 and eventually break above the $7,800 to $8,000 range to pull off a trend reversal.
Only time will tell.
In the meantime, swing traders and long-term investors could consider placing a buy order at $5,500 just in case; and day traders will continue to watch for Bitcoin price to press above $7,300 and take another shot at the resistance at $7,600.
By Horus Hughes
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Published at Sun, 22 Dec 2019 13:16:06 +0000
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