- Bitcoin's sharp decline amid the Terra implosion led the cryptocurrency to test an important support level at $27,200.
- If bitcoin decisively breaks that support level, the crypto could drift 40% lower to $18,300, Katie Stockton of Fairlead Strategies said.
- "The recent breakdown below the weekly cloud [support] reflected negative intermediate-term momentum," Stockton said.
Bitcoin's months-long decline has led the cryptocurrency to recently test and so far hold an important support level at $27,200, Fairlead Strategies' Katie Stockton highlighted in a note on Monday.
The decline in bitcoin and other cryptocurrencies accelerated over the past week following the implosion of Terra, an algorithmic based stablecoin that broke the buck and fell more than 90%. The failure of that stablecoin tested the confidence of crypto investors and drove a brief dip in bitcoin to as low as $25,401.
Bitcoin has since recovered and is trading above the important psychological price point of $30,000 as of Tuesday morning.
But if the crypto fails to decisively hold $27,200 as support, defined as two weekly Friday closes below that level, then the cryptocurrency could fall another 40% from current levels to $18,300, Stockton said.
"The recent breakdown below the weekly cloud [support] reflected negative intermediate-term momentum, which increases risk beyond the near term," Stockton said. Both the intermediate-term and long-term momentum trends for bitcoin are currently categorized as "bearish" by Stockton, while its short-term momentum trend is "neutral."
"Short-term oversold indicators support further stabilization following the successful test of support, based in part on the DeMARK Indicators," Stockton said.
If bitcoin can stabilize and rise amid a risk-on rally, Stockton has her eye on potential resistance around the declining 50-day moving average, which currently sits around $39,000. That would represent potential gains of 30% if bitcoin tests that resistance level, which is falling lower and lower by the day given the ongoing downtrend in the cryptocurrency.
Bitcoin has dropped 57% from its record high of about $69,000 in November, erasing $700 billion in market value, according to data from CoinMarketCap. Altogether, the total crypto market value has fallen from a peak of around $3 trillion to $1.3 trillion today.
"Risk is heightened from a long-term perspective, noting the monthly MACD is on a 'sell' signal and the monthly stochastics are not yet oversold," Stockton concluded.
