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This Technical Indicator Suggests Bitcoin's Rally May Be Overbought

This Technical Indicator Suggests Bitcoin's Rally May Be Overbought
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Bitcoin rallied another 6.2 percent on Tuesday, breaching the $8,000 level for the first time in two months. The cryptocurrency is now up 17.4 percent in the past week, but at least one technical indicator is suggesting the bitcoin rally may be overbought.

What To Know

According to CoinDesk, bitcoin’s RSI reached 74.56 on Tuesday, its highest level since it reached its all-time high near $20,000 back in December. Any RSI reading above 70 is considered overbought.

RSI is an abbreviation for relative strength index, a technical metric that measures short-term momentum. RSI is a measure of how strong recent gains have been compared to recent losses. The equation for calculating RSI is as follows:

RSI = 100 - 100 / (1 + RS)

Why It's Important

Where RS is the average gain of up periods divided by the average loss of down periods. The typical period for RSI calculation is 14 trading days.

RSI ranges from 0 to 100, with readings over 70 considered overbought and readings below 30 considered oversold. Technical traders often see these extreme overbought and oversold levels as opportunities for a correction, something bitcoin traders should be prepared for in coming days.

What's Next

The good news for long-term bitcoin investors is that these short-term RSI corrections often have nothing to do with the longer-term trend. Bitcoin investors are hoping the recent strength is a sign the cryptocurrency is finally back on the right track after losing more than half its value in the first half of the year.

Even after the recent rally, the Bitcoin Investment Trust (OTC: GBTC) is down more than 45 percent overall in 2018.

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