Cardano (ADA) has formed a deadly "death cross" on its daily chart against Bitcoin (BTC) — a market signal that's generally seen as a warning of more downside in the near term.
The ominously-titled indicator kicks in when an asset's short-term moving average closes below its long-term moving average. In doing so, it calls for technically-minded traders to increase their bearish positions in the market.
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ADA/BTC in trouble
On Tuesday, ADA's 50-day exponential moving average (50-day EMA; the velvet wave) dropped below its 100-day exponential moving average (100-day EMA; the blue wave). That marked the sixth 50–100 EMA bearish crossover ever on the ADA/BTC daily chart, raising fears of further declines ahead.
That is partly due to ADA's earlier price reactions to death crosses. For instance, in September 2020, the Cardano token's price dropped almost 38.50% against Bitcoin after painting a 50–100 EMA bearish crossover.
Similarly, a death cross pattern on May 12, 2019, subsequently saw a 62.50% price decline.
Nonetheless, the likelihood of an immediate selloff remains relatively low. That is mainly because ADA's daily relative strength index (RSI), which alerted the token's status against Bitcoin as oversold, is below 30. Traders typically treat an excessively sold RSI as their cue to enter the market.
For instance, in May 2019, the death cross's formation coincided with the RSI treading below 30. Later, the price bounced by over 30% to retest the 50-day and 100-day EMA waves as resistance, underscoring traders' intention to buy oversold cryptos.
Applying the same fractal to the current price action, one can expect the ADA/BTC rates to bounce back, especially as it drops to its two-month-low at 0.00003372 BTC runs down to retest a five-month-old support area defined by 0.00003192–0.00003075 BTC (the red bar in the first chart above).
That inverse Cup and Handle
A weakening ADA/BTC rate merely reflects Cardano's clumsy performance against the U.S. dollar in recent sessions versus Bitcoin, which has surged massively against the greenback in the same timeframe.
For instance, Bitcoin's month-to-date gains against the dollar sit around 43%. In comparison, Cardano's price has slid by over 6% during the same period.
But further weakness could be expected, according to an inverse Cup and Handle pattern taking shape on its dollar-quoted charts.
In detail, inverse Cup and Handle patterns appear when the price forms a large crescent shape followed by a modest upward retracement.
Analysts consider them as bearish reversal indicators, for they tend to send the price down by as much as the maximum distance between the Cup's top and its right-hand's bottom level if the price breaks below the pattern's support.
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ADA's recent price action fits the inverse Cup and Handle description, with the price now looking to break below the structure's resistance line near $1.97. As a result, the downside target price is the $0.772–$0.820 area if Cardano confirms a bearish breakout.
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