Chainlink's 40% Surge Marked by Reactivated Wallets and Investor Confidence: A Closer Look at Potential Bearish Signals
Summary:
Chainlink (LINK) has spiked nearly 40% in a week to a two-year high of $19.75, due to the reactivation of dormant wallets, increased liquidations in its network, and increased holding behavior among traders. However, a bearish divergence is becoming increasingly evident in LINK's weekly chart, indicating a potential trend reversal and increasing risks of a bull trap. Record-breaking open interest in LINK's derivatives market also signals increased risk of market drops.
Chainlink's (LINK) valuation has soared by nearly 40% within a week, peaking at $19.75, marking a two-year high. This rally has been influenced by three key determinants which have stimulated investor interest. However, despite the price hike, a lack of substantial momentum implies the possibility of a bull trap. Let's delve into these influences. So why is LINK's price increasing?
Firstly, the previously inactive LINK wallets have seen a phenomenal surge in activity, toppling all previous records for the "Age Consumed" index. As per Santiment, the swift introduction of older LINK tokens back in circulation could help explain the price upshot. The amount of Chainlink in circulation has possibly influenced the price bump. Meanwhile, minor liquidations within the network have been observed, which can often be a signal of #FUD, a potential driver for further price hikes.
Interestingly, entities that hold more than 10,000 LINK tokens have dramatically increased their supply following news about the reanimation of dormant wallets, indicating wealthy traders are gathering momentum.
From another perspective, data from Lookonchain shows 47 new wallets have offloaded more than 2.23 million LINK worth about $42.38 million from Binance since February 5. This suggests a growing trend among traders to hold while prices go up.
However, if one scrutinizes LINK’s weekly chart, it exhibits a growing bearish divergence suggesting a likely shift in trends. The weekly charts reveal a widening gap between rising prices and a declining relative strength index (RSI), signalling that despite an upward trend in prices, the backing momentum for this buying pressure appears to be ebbing over time.
Next up, LINK's RSI hovers close to 70, the overbought limit that typically elevates the chances of a price correction for the underlying asset.
These bearish hints for LINK intensify as its price approaches the $19.50 mark, depicted by a black horizontal line in the chart, which was previously a corner of support now functioning as resistance. Traditionally, this line has triggered extended correction periods upon being tested.
Consequently, if LINK fails to breach the $19.50 barrier decisively, the risk of a drop to its subsequent support line at $12.25 heightens over the coming weeks. This level coincides with LINK's 50-week exponential moving average (EMA; depicted as the red wave), which usually serves as support.
In contrast, a successful move beyond $19.50 could propel LINK towards its 0.382 Fibonacci line at $23.50.
Furthermore, LINK’s price hike coincides with a notable increase in its derivatives market open interest (OI). As of February 6, LINK's outstanding derivative contracts value stood at an all-time high of $592.29 million.
Also, LINK's funding rate presently shows a positive situation, indicating bullish market sentiments and renewed demands for longs. Paired with the upshot in LINK's OI, it signals traders are doubling down on their positions to go long. This could potentially amplify profits if the market sees an upswing; however, it equally raises the risk of significant losses if the tides shift.
For instance, in April 2021, Chainlink’s OI spiked to $521.25 million against positive funding rates. This optimistic outlook was short-lived as LINK's price hit an apex of roughly $54.40 in May 2021, followed by a bearish spiral, which led to a massive 90% plunge. The turnaround snared many bullish traders and led to substantial losses. If past trends are anything to go by, LINK's ongoing price rally could end up being a bull trap.
Bear in mind, this piece is absent of investment advice or recommendations. Every trading or investment move carries risks, so readers should undertake their research before proceeding with financial decisions.
Published At
2/6/2024 6:45:00 PM
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