Is the monthly RSI bottom divergence + the weekly morning star a bargain hunting opportunity?

A monthly RSI bottom divergence paired with a weekly morning star pattern may signal a strong bullish reversal in crypto, especially when confirmed by volume and key support levels.

Jun 30, 2025 at 09:57 pm

Understanding RSI Bottom Divergence in Monthly Timeframes

The Relative Strength Index (RSI) is a momentum oscillator commonly used to identify overbought or oversold conditions in the market. When traders refer to a monthly RSI bottom divergence, they're observing a situation where the price makes a lower low, but the RSI makes a higher low on the monthly chart. This suggests that while prices are falling, the downward momentum may be weakening.

In cryptocurrency trading, especially with highly volatile assets like Bitcoin or Ethereum, this kind of divergence can signal potential reversals. It's crucial to note that divergence alone isn't a confirmation of a reversal; it merely indicates a possible shift in momentum. Traders should look for additional signals such as volume spikes, candlestick patterns, or support/resistance levels before acting.

Decoding the Weekly Morning Star Pattern

The morning star is a bullish candlestick pattern typically found at the end of a downtrend. On the weekly chart, this formation becomes more significant due to the longer time frame, which filters out much of the noise seen in shorter intervals. The pattern consists of three candles: a large bearish candle, followed by a small-bodied candle (often a doji), and finally a large bullish candle.

When this pattern appears on the weekly chart after a sustained downtrend in crypto markets, it often signals a strong possibility of a trend reversal. The key here is confirmation—traders must wait for the third candle to close above the midpoint of the first candle to validate the pattern.

Combining Monthly RSI Divergence with Weekly Morning Star

Using both the monthly RSI bottom divergence and the weekly morning star together creates a confluence of technical indicators that can enhance the probability of a successful trade. The idea is that if both signals align, they reinforce each other and provide a stronger case for a potential bullish move.

For example, if Bitcoin has been declining for several months, showing a clear RSI bottom divergence on the monthly chart, and simultaneously forms a morning star pattern on the weekly chart, this could suggest that the downtrend is losing steam and buyers are starting to step in. However, even with this alignment, traders should not ignore risk management principles.

Practical Steps to Confirm These Signals in Crypto Markets

• Step 1: Identify the monthly RSI bottom divergence. Use an RSI period of 14 and ensure that the price makes a lower low while the RSI makes a higher low.
• Step 2: Switch to the weekly chart and look for the morning star pattern. Ensure all three components are present and confirmed.
• Step 3: Check volume during the formation of the morning star. A surge in volume on the third candle strengthens the validity of the pattern.
• Step 4: Look for nearby support levels or key psychological price zones that align with these signals.
• Step 5: Wait for a candle close above the resistance level formed by the morning star’s high to confirm entry.

Each of these steps plays a vital role in filtering out false signals and increasing the reliability of the setup.

Risk Management Considerations for Bargain Hunting

Even when both the monthly RSI divergence and weekly morning star appear aligned, entering a position without proper risk control can lead to significant losses. In crypto markets, volatility can cause rapid price swings that may stop out traders prematurely.

Traders should:

• Place a stop-loss below the lowest point of the morning star pattern.
• Limit position size to no more than 1–2% of total capital.
• Monitor for any bearish reversal patterns that might invalidate the setup.
• Avoid chasing entries if the price has already moved significantly after the pattern completes.

It’s also important to remember that technical analysis is not foolproof. Market sentiment, news events, and macroeconomic factors can override even the strongest technical setups.

Frequently Asked Questions

Q1: Can I use RSI divergence on time frames shorter than monthly?

Yes, RSI divergence can be applied to daily, weekly, or even hourly charts. However, the monthly divergence carries more weight due to its longer-term perspective and reduced susceptibility to short-term noise.

Q2: What if the morning star pattern fails after forming on the weekly chart?

A failed morning star is not uncommon in crypto markets. If the price continues to fall after forming the pattern, it’s best to exit the trade quickly. False breakouts occur frequently, especially around major news events or regulatory updates.

Q3: How reliable is the combination of RSI divergence and morning star in altcoins?

While this combination works well in major cryptocurrencies like BTC and ETH, it may produce less reliable results in smaller-cap altcoins due to their erratic price behavior and low liquidity. Extra caution is advised when applying these strategies to lesser-known tokens.

Q4: Should I combine these signals with other indicators like MACD or moving averages?

Yes, adding complementary tools like the MACD or moving averages can help filter out weak signals and improve overall accuracy. For instance, a rising MACD line alongside a morning star adds further confirmation to the bullish scenario.