Ethereum (CRYPTO: ETH) plunged over 10% lower at 4 a.m. and 9 a.m. on Thursday morning before bulls came in and bought the dip near the dip just above the $1,700 level.
The slide set Ethereum into a downtrend, although there is a possible bullish double bottom pattern that could become the dominate one over the coming days.
A downtrend occurs when a stock consistently makes a series of lower lows and lower highs on the chart.
The lower lows indicate the bears are in control, while the intermittent lower highs indicate consolidation periods.
Traders can use moving averages to help identify a downtrend, with descending lower timeframe moving averages (such as the eight-day or 21-day exponential moving averages) indicating the stock is in a steep shorter-term downtrend.
Descending longer-term moving averages (such as the 200-day simple moving average) indicate a long-term downtrend.
A stock often signals when the lower low is in by printing a reversal candlestick such as a doji, bullish engulfing or hammer candlestick. Likewise, the lower high could be signaled when a doji, gravestone or dragonfly candlestick is printed. Moreover, the lower lows and lower highs often take place at resistance and support levels.
In a downtrend, the "trend is your friend" until it’s not, and in a downtrend, there are ways for both bullish and bearish traders to participate in the stock:
- Bearish traders who are already holding a position in a stock can feel confident the downtrend will continue unless the stock makes a higher high. Traders looking to take a position in a stock trading in a downtrend can usually find the safest entry on the lower high.
- Bullish traders can enter the trade on the lower low and exit on the lower high. These traders can also enter when the downtrend breaks and the stock makes a higher high, indicating a reversal into an uptrend may be in the cards.
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The Ethereum Chart: On Thursday, when Ethereum fell below the most recent low of $1,909.51 that was printed on Tuesday, the crypto printed a lower low to confirm a downtrend is in play. The most recent higher low was printed at the $2,020 level on Wednesday.
- Ethereum’s downtrend is taking place beneath a descending trendline on the daily chart, from which which the crypto has tried to break higher on four separate occasions since May 10 and failed. Conservative bullish traders may choose to watch for Ethereum to eventually break up from the trendline on higher-than-average volume, which could signal a large reversal to the upside is in the cards.
- It’s possible a break of the trendline could come soon because Ethereum has developed bullish divergence. Bullish divergence occurs when a stock or crypto makes a series of lower lows but the relative strength index (RSI) forms a series of higher lows. The increasing RSI also indicates momentum to the upside.
- Ethereum may have printed a double bottom pattern on May 12 and Thursday near the $1,717 mark. If the pattern becomes recognized, the formation could accelerate a move to the upside. If that pattern and the bullish divergence don’t come into play, the crypto is likely to continue trading in its downtrend.
- Ethereum has resistance above at $2,150.54 and $2,317.64 and support below at $1,717.41 and $1,421.80.
