Chainlink’s 40% weekly rally could be a ‘bull trap’ for LINK price.
The price of Chainlink (LINK) rose by roughly 40% last week to $19.75, the highest level in two years. At least three incentives have fueled investor confidence and created this buying behavior.
However, the price increase is not accompanied by strong momentum, increasing the risks of a bull trap. Let's take a closer look at these reasons.
Why is the price of LINK increasing?
First, a significant activation of previously dormant wallets was observed, leading to the highest recorded peak in the “age consumed” parameter. Santiment argued that the sudden introduction of old LINK tokens into circulation contributed to the price jump.
Network distribution contributed to the price jump. In addition, the network has seen minor wallet leaks, which is often a sign of #FUD that contributes to further inflation.
(go on)
— Santiment (@santimentfeed) February 1, 2024
For example, ChainLink's supply, held by entities holding more than 10,000 LINK tokens, rebounded after the news of the sleeper wallet, suggesting that wealthy traders are accumulating.
In addition, since February 5, 47 fresh wallets have withdrawn $42.38M worth of over 2.23 million LINK from Binance, according to data source Lookonchain. This shows a growing persistence behavior among traders between price gains.
However, a closer look at LINK's weekly chart shows that bearish divergence is becoming increasingly apparent, hinting at the possibility of a reversal trend.
Bull trap potential increases on LINK weekly charts
LINK's weekly chart shows a growing gap between the rising price and the Relative Strength Index (RSI). This suggests that despite rising inflation, the impetus behind buying is weakening in the long run.
Additionally, LINK's RSI is close to 70, an overbought threshold that typically increases correction risks for the underlying asset.
These bearish technical signals for LINK are intensifying as the price approaches a support-turned-resistance trend near the $19.50 level marked by the black horizontal line on the chart above. Historically, this trend has initiated broader correction periods when tested as resistance.
Therefore, LINK is more likely to fall to its next support line at $12.25 in the coming weeks if it fails to break the $19.50 resistance. This downside target is near the LINK 50-week exponential moving average (50-week EMA; red wave), another historical support.
Related: Bitcoin Buyers Far From $25K Target As BTC Price Sets New February High
Conversely, a break above $19.50 could push LINK towards the 0.382 Fibonacci line at $23.50.
LINK open demand is alarmingly high.
The rise in LINK's price was caused by a significant increase in open interest (OI) in the derivatives market. In the year As of February 6, the net value of LINK's outstanding contracts was $592.29 million, a record high.
Meanwhile, LINK's funding rate is positive, indicating market sentiment is bullish, and long-term interest is high. Combined with the spike in LINK's OI, it also suggests that traders are using their position to go long.
While this can increase profits if the market goes up, it also increases downside risk if the market goes down.
For example, in April 2021, Chainlink saw OEI grow to $521.25 million with positive funding rates. However, this optimism quickly turned sour when the price of LINK rose to around $54.40 in May 2021, before entering a bear cycle where the price fell by 90%.
The reversal caused huge losses by trapping many bulls. If history is any indication, LINK's continued price rally risks catching overpowered bulls.
This article does not contain investment advice or recommendations. Every investment and business activity involves risk, and readers should do their own research when making a decision.
