Sunday, December 5, 2021


When an asset enters a bear part and the headlines are destructive, analysts challenge additional draw back, and the sentiment shifts from optimism to pure gloom and doom. This ends in panic gripped merchants dumping their positions close to the underside of the downtrend as an alternative of shopping for. 

How can merchants go in opposition to the herd and construct the braveness to purchase in a bear market? It isn’t straightforward as a result of in the event that they buy too early, the place could shortly flip right into a loss. Nevertheless, in the event that they look ahead to too lengthy, they might miss the early a part of the rally.

Though pulling the set off throughout a bear part is troublesome, the relative energy index (RSI) indicator can establish market bottoms and favorable threat to reward situations.

Let’s evaluation just a few examples of when to purchase in a bear market.

Search for extraordinarily oversold ranges on the RSI

BTC/USDT each day chart. Supply: TradingView

Bitcoin (BTC) topped out near $20,000 in December 2017 and began a protracted gut-wrenching bear market that bottomed out close to $3,300 in December 2018. Throughout this era, the RSI entered the oversold territory (a studying beneath 30) on 5 events (marked as ellipses on the chart).

Within the first 4 cases, the RSI dipped near or simply beneath the 30 stage however through the fifth time, the RSI dropped to 10.50. It is a signal of capitulation the place merchants who had been shopping for pre-empting a backside or had held their positions within the bear market succumbed to worry and purged their holdings.

Normally, lengthy bear markets finish after extended durations of fear-based promoting. Good merchants look ahead to these alternatives and purchase when the markets are deeply oversold, like when the RSI beneath 20.

BTC/USDT each day chart. Supply: TradingView

Quick ahead to 2019 and 2020 when the RSI dipped shut to twenty on two events and dropped to fifteen.04 on March 12, 2020.

The primary occasion when the pair dropped to 19.60 on Sep. 26, 2019, turned out to be a shedding commerce as a result of the worth made a brand new native low weeks afterward Oct. 23, 2019. This reveals that merchants needs to be prepared to shut their positions when the stops hit as a result of in the event that they don’t do this, the losses could continue to grow.

On Nov. 24, 2019, the RSI dropped to 22.32, simply above the 20 stage. For merchants who maintain a really tight cease, this may have additionally turned out to be a shedding commerce with the drop on Dec. 18, 2019. Nevertheless, these had been all small losses, which might not make a dent to the portfolio until merchants had been utilizing heavy leverage.

The RSI plunged to fifteen.04 on March 12, 2020, and merchants who had been courageous sufficient to purchase after this drop would have made outsized positive factors had they held onto their positions through the bull part, which topped out at $64,854 on April 14, 2021. This reveals how after two shedding purchases, merchants finally hit the jackpot utilizing the RSI sign.

Combining the RSI with shifting averages produces a greater sign

Throughout Ether’s (ETH) bear part in 2018, there have been 4 cases when the RSI dipped beneath or got here near the 20 stage. The primary alternative supplied a powerful return to merchants however the different two cases turned out to be losers.

To keep away from whipsaws, merchants could add additional filters to maintain them out of shedding trades. One easy instance may very well be that as an alternative of shopping for simply after the RSI drops beneath 20, merchants could look ahead to the worth to shut above the 20-day exponential shifting common for 3 successive days earlier than buying.

ETH/USDT each day chart. Supply: TradingView

As seen within the chart above, the sign to purchase in April 2018 triggered because the ETH/USDT pair rose above the 20-day EMA after dropping beneath the 20 stage on the RSI. This commerce turned out to be worthwhile because the pair witnessed a pointy up-move.

The subsequent purchase sign in August didn’t meet the standards as a result of the worth didn’t rise above the 20-day EMA for 3 consecutive days. The third commerce in September would have was a minor loss however the one in November would have made an enormous revenue.

Bullish divergences and tips on how to spot them

One other necessary instrument that may assist warn merchants of a potential development reversal is a bullish divergence. This occurs when the worth continues to fall however the RSI makes larger lows, indicating the bearish momentum may very well be weakening.

LTC/USDT each day chart. Supply: TradingView

Litecoin (LTC) reveals the formation of two bullish divergences through the 2018 bear part. The primary divergence that fashioned from August to September of 2018 turned out to be a false sign as a result of the worth didn’t rise above the swing excessive.

Nevertheless, the second bullish divergence from November to December of 2018 turned out to be a worthwhile sign proper on the backside, which was adopted by a pointy rise inside the subsequent few days.

ETC/USDT each day chart. Supply: TradingView

One other instance of a barely longer bullish divergence could be seen in Ethereum Traditional (ETC) from September to December 2019. Throughout the interval, the worth made decrease lows however the RSI fashioned larger lows. The ETC/USDT pair surged within the subsequent few days after it broke above the swing excessive.

VET/USDT each day chart. Supply: TradingView

VeChain (VET) additionally confirmed the formation of a bullish divergence from September 2020 to October 2020, which was adopted by an enormous bull run. This reveals the bullish divergence is a useful gizmo, which if used correctly can profit the merchants immensely.

Some necessary takeaways

Bear markets provide the chance to purchase an asset at a big low cost however it’s not straightforward to buy when everyone seems to be promoting and the sentiment is destructive.

Nevertheless, merchants who use the RSI can develop an edge. An especially oversold studying on the RSI is an indication of capitulation, which usually marks the tip of a bear part. This technique may also help merchants pull the set off when it issues.

Generally, the RSI could give false alerts, therefore, merchants can use extra filters like each day closes above the 20- and 50-day shifting common to keep away from whipsaw trades. Recognizing bullish divergences may also alert merchants {that a} downtrend could also be ending.

The views and opinions expressed listed here are solely these of the writer and don’t essentially replicate the views of Each funding and buying and selling transfer includes threat, you need to conduct your individual analysis when making a choice.