Bitcoin is close to breaking a key support level which could point to 27% downside ahead, Fairlead's Katie Stockton says

"Short-term momentum is now to the downside, suggesting that short-term oversold conditions may not prevent a breach of support this week."

• Bitcoin is flirting with a key support level that could give way to more downside if broken, according to Fairlead Strategies' Katie Stockton.
• Consecutive weekly closes below $37,400 would suggest a continued downtrend to $27,000.
• "The weekly stochastics have turned lower, further increasing the possibility of a breakdown," Stockton said in a Monday note.

Bitcoin prices are gearing up for a big test of support as momentum indicators continue to deteriorate, according to Katie Stockton of Fairlead Strategies.

The cryptocurrency is flirting with a key support level at $37,400, and if decisively broken would suggest a continuation of the ongoing downtrend to secondary support at $27,200, according to a Monday note from Stockton. That represents downside potential of 27% from current levels.

"Downside momentum still has a hold from an intermediate-term perspective, and the weekly stochastics have turned lower, further increasing the possibility of a breakdown," Stockton explained.

Bitcoin traded to a low of around $36,500 on Tuesday before staging a rebound to about $38,000. The cryptocurrency has been in risk-off mode since it hit a high of about $69,000 in November. Recent weakness has been exacerbated by anticipated interest rate hikes from the Federal Reserve and rising geopolitical tensions between Russia and Ukraine.

What's key to the expectation of more potential downside in bitcoin, according to Stockton, is a decisive break of support which is represented by two consecutive weekly closes below $37,400.

If that level is decisively broken, "risk should be managed" as long-term momentum has recently weakened to neutral territory from bullish, Stockton observed. Meanwhile, intermediate-term momentum is neutral while short-term momentum is bearish.

"Short-term momentum is now to the downside, suggesting that short-term oversold conditions may not prevent a breach of support this week," Stockton explained.

But if bitcoin manages to mount a positive turnaround in price action and reverse some recent losses, it is likely to be met with resistance around $42,500, according to Stockton, representing potential upside of 13% from current levels.