How to follow up the monthly RSI bottom divergence + weekly positive enveloping negative + daily line breaking through the neckline?

Monthly RSI bottom divergence, weekly bullish engulfing, and daily neckline breakout together signal a high-probability bullish reversal in crypto.

Jul 27, 2025 at 08:56 am

Understanding Monthly RSI Bottom Divergence

When analyzing monthly RSI bottom divergence, traders look for a scenario where the price of a cryptocurrency makes a new lower low, but the RSI indicator forms a higher low on the monthly chart. This indicates weakening downward momentum and a potential reversal. To identify this pattern:

• Open the monthly chart of the cryptocurrency in your trading platform.
• Apply the Relative Strength Index (RSI) with the default period of 14.
• Observe two consecutive price troughs where the second trough is lower than the first.
• Compare the corresponding RSI values at these troughs. If the RSI value at the second trough is higher than at the first, a bottom divergence is confirmed.
• Ensure the RSI remains below 30 during both lows to confirm oversold conditions.
  

  This divergence suggests that selling pressure is diminishing, even as the price continues to fall. It's a strong early signal of a potential bullish reversal, especially when combined with other confirmatory indicators.

  Identifying the Weekly Positive Enveloping Negative Candle

  
  A weekly positive enveloping negative pattern is a bullish reversal candlestick formation that occurs when a green (positive) candle completely "envelops" the body of the previous red (negative) candle on the weekly chart. To spot this:
• Navigate to the weekly timeframe of the cryptocurrency.
• Look for a red candle followed by a green candle.
• The opening price of the green candle must be lower than the closing price of the red candle.
• The closing price of the green candle must be higher than the opening price of the red candle.
• The green candle’s body should fully cover the body of the prior red candle.
  

  This pattern reflects a shift in market sentiment. Sellers initially pushed the price down, but buyers stepped in aggressively, reversing the trend and overpowering the bears. When this occurs after a prolonged downtrend, it strengthens the case for a bullish reversal, especially when aligned with RSI divergence on the monthly chart.

  Analyzing the Daily Price Break Above the Neckline

  
  The neckline is a key resistance level derived from a technical pattern such as a double bottom or inverse head and shoulders. A breakout above this line on the daily chart confirms the reversal. To determine the neckline:
• Identify at least two distinct price lows on the daily chart forming a potential bottom pattern.
• Draw a horizontal line connecting the highest point between these two lows—this is the neckline.
• Wait for a daily candle to close above this neckline with strong volume.
  

  To validate the breakout:

  • Check that the closing price is above the neckline, not just an intraday spike.
  • Confirm increased trading volume compared to the prior 10–20 days.
  • Use volume indicators like On-Balance Volume (OBV) or Volume Weighted Average Price (VWAP) to assess buying pressure.

  A confirmed breakout suggests that demand has overcome supply, and the asset may enter a new uptrend. This signal gains more weight when preceded by monthly RSI divergence and a weekly enveloping bullish candle.

  Combining the Three Signals for Entry Confirmation

  
  When monthly RSI bottom divergence, weekly positive enveloping negative, and daily neckline breakout align, the probability of a sustained upward move increases significantly. To act on this confluence:
• Ensure all three conditions are met sequentially—divergence first, then the weekly candle, then the daily breakout.
• Use the daily close as the trigger for entry, not intraday movements.
• Set a buy order slightly above the daily breakout candle’s high to avoid false pullbacks.
• Place a stop-loss just below the most recent swing low on the daily chart.
• Consider scaling in: allocate 50% of position on breakout confirmation, the rest after a retest.
  

  Risk management is critical. Never risk more than 1–2% of your trading capital on a single setup. Use trailing stop-loss orders to protect profits as the price rises.

  Practical Steps to Monitor and Execute the Strategy

  
  To implement this strategy effectively:
• Use a multi-timeframe dashboard to simultaneously view monthly, weekly, and daily charts.
• Enable price alerts for RSI levels and candlestick patterns on platforms like TradingView.
• For RSI divergence, manually verify the lows and RSI readings—automated scanners may miss subtle divergences.
• When the weekly enveloping candle forms, mark the potential reversal zone.
• On the daily chart, draw the neckline in real time and set a breakout alert.
• Once the daily close is above the neckline, execute the trade during the next session’s opening.
  

  Platforms like Binance, Bybit, or KuCoin allow custom alerts and conditional orders. For example:

  • Set a conditional buy order triggered when price exceeds the neckline.
  • Attach a stop-loss and take-profit level at the time of order placement.
  • Use post-only or reduce-only options to avoid unintended liquidation in volatile markets.

  Backtesting and Historical Validation

  
  Before live trading, backtest this strategy on historical data:
• Select major cryptocurrencies like BTC, ETH, or SOL.
• Scroll back 3–5 years on monthly, weekly, and daily charts.
• Manually scan for instances where all three signals coincided.
• Record the price action following each occurrence.
• Measure the percentage of breakouts that led to sustained rallies (e.g., +20% within 30 days).
  

  Tools like TradingView’s replay mode allow you to simulate real-time decision-making. Focus on high-liquidity assets to avoid false signals caused by low-volume manipulation. Document each case to refine entry rules and filter out weak setups.

  Frequently Asked Questions

  
  What if the daily candle breaks the neckline but closes below it?
  A breakout requires a confirmed close above the neckline. If the candle wicks above but closes below, it's a false breakout. Wait for another daily close above the level before acting.
  

  Can this strategy be applied to altcoins with low market cap?
  
  It's not recommended. Low-cap altcoins are prone to pump-and-dump schemes and erratic volume, which can generate misleading RSI and candlestick signals. Stick to top 50 cryptocurrencies by market cap.

  How long should I wait after the weekly enveloping candle before expecting a breakout?
  
  There's no fixed timeline. Some breakouts occur within 1–2 weeks, others take 4–6 weeks. The key is patience and confirmation—never anticipate the breakout before the daily close validates it.

  What volume level confirms a valid daily breakout?
  
  The breakout volume should be at least 1.5 times the 20-day average volume. Use the volume indicator on your chart to compare. Low-volume breakouts are suspect and often fail.