Bitcoin Faces Price Pullback Amid Extremely Overbought Conditions

View Bitcoin's quick drop from a 4.5-month high of $5,345 to levels below $5,000 validates the extremely overbought readings on the 14-day relative strength index.

The longer-term outlook will remain bullish as long as bitcoin's price holds above the former resistance-turned-support of $4,236.

Bitcoin could be in for a minor price pullback as the RSI is showing the most overbought conditions for 16 months.

With the near 30 percent rally to 4.5-month highs seen in the last 48 hours, bitcoin's 14-day relative strength index - a widely-followed momentum indicator - has jumped above 70.00, indicating overbought conditions.

An overbought reading on the RSI is often taken to be a sign of impending bearish reversal.

In reality an above-70 print merely indicates that the rally is overdone and a reaction - a price pullback - could be in the offing.

These overbought indicators become valid only when the price begins to flash early signs of buyer exhaustion, which seems to be the case with BTC. The cryptocurrency witnessed a sharp drop to $4,800 within two hours of hitting highs above $5,300 at 21:00 UTC yesterday and is now struggling to hold onto price points above $5,000.

As a result, price consolidation or a deeper pullback to $4,600 could be seen in the next couple of days.

On the hourly chart, the RSI has rolled over from the overbought territory, having charted lower highs over the last 48 hours, contradicting the higher highs on price.

That bearish divergence also favors a price pullback to key support levels lined up at $4,672 and $4,565.