Crypto Market Analysis: Bitcoin and Ether Approaching Oversold Levels

Bitcoin and ether prices, down 4% and 12% over the last seven days, are approaching traditionally oversold levels, when using the RSI as a tool of measurement. The question is whether that even matters.

RSI, or the relative strength index, is a commonly used tool in technical analysis. I personally use it frequently, with the caveat being that I tend to use a 10-day RSI as opposed to the conventionally used 14-day RSI.

Part of the RSI’s popularity is driven by its relatively straightforward set of “rules.” While not ironclad, they allow novices as well as seasoned professionals to quickly evaluate an asset’s price level and determine where it falls in the range of cheap vs. expensive.

In general, an RSI reading of 70 or more indicates that an asset is “overbought,” while a reading of 30 or less implies that an asset is “oversold.” The RSI levels for BTC and ETH are about 32 and 34, respectively.

Traders using RSI in isolation may be looking to soon establish long positions, with the rationale that the sell-off has gone too far. But how would this have worked historically?

Looking back at pricing data from January 2015 for BTC and November 2017 for ETH shows the following: (Note the mismatch in the start date results from availability of ETH pricing data.)

RSI for BTC has fallen below 30, 106 times. The average one-day, seven-day and 30-day returns following a sub-30 reading have been 1.3%, 3.8% and 7.2% respectively.

RSI for ETH has fallen below 30, 118 times, implying that ETH has been an undersold asset more often than BTC, despite the shorter date range. The average one-day, seven-day and 30-day returns following a sub-30 reading have been 0%, -1.8% and 13.5%.

So where does that leave us? Given current RSI levels, not too bad off actually. Applying an RSI range of greater than 32 and less than 35 shows 79 and 67 occurrences over our data set for both BTC and ETH.

Both were essentially flat over the one- and seven-day periods, but we saw average returns of 4.6% and 5.5% for BTC and ETH over the next 30 days.

This data shows that in the past investors have seen gains, buying BTC and ETH at the current RSI levels. They have done better, however, when buying when RSI fell below 30.

Ultimately, this depends on past relationships continuing into the future. That is certainly not guaranteed, especially given the backdrop of contagion risks in the crypto sector and macroeconomic fears.

But examining what has and hasn't mattered to date may give investors an opening framework.