Chainlink (LINK) has experienced a remarkable price surge of around 40% in the past week, reaching its highest level in two years at $19.75. Several catalysts have fueled investor confidence and driven this buying frenzy. However, despite the price increase, there are concerns about a potential bull trap due to weak momentum. Let’s delve deeper into these factors.
The first factor contributing to the rise in LINK’s price is the significant activation of previously dormant wallets, resulting in a spike in the “Age Consumed” metric. Santiment suggests that the sudden circulation of old LINK tokens from these wallets has played a role in the price jump. Notably, entities holding more than 10,000 LINK tokens have seen an increase in their Chainlink supply, indicating accumulation by wealthy traders.
Furthermore, data from Lookonchain reveals that 47 new wallets have withdrawn over 2.23 million LINK, equivalent to $42.38 million, from Binance since February 5. This suggests that traders are increasingly holding onto their LINK amidst the price gains.
However, a closer analysis of LINK’s weekly chart reveals a bearish divergence, indicating a potential trend reversal. The rising prices contrast with the declining relative strength index (RSI), indicating weakening buying pressure over the long term. Additionally, the RSI is nearing 70, the overbought threshold that typically heightens the risk of correction for the underlying asset.
These bearish technical signals for LINK become more pronounced as the price approaches the support-turned-resistance trendline at around $19.50. Historically, this trendline has triggered broader correction periods when tested as resistance. Therefore, if LINK fails to decisively break above $19.50, there is a high risk of it falling towards its next support line at $12.25 in the coming weeks. This downside target aligns with LINK’s 50-week exponential moving average (50-week EMA), which has served as historical support.
On the other hand, if LINK manages to break above $19.50, it could potentially reach its 0.382 Fibonacci line at $23.50.
Interestingly, alongside the price rise, LINK has witnessed a significant increase in its open interest (OI) in the derivatives market. As of February 6, the net value of LINK’s outstanding derivative contracts reached a record high of $592.29 million. Additionally, the funding rate for LINK is positive, indicating bullish market sentiment and a higher demand for long positions. This, combined with the surge in LINK’s OI, suggests that traders are leveraging their positions to go long.
While this strategy can amplify profits during a market rise, it also exposes traders to the risk of liquidation if the market declines. A similar scenario occurred in April 2021 when LINK’s OI reached $521.25 million with positive funding rates. However, the optimism quickly turned sour as LINK’s price peaked at around $54.40 in May 2021, leading to a bearish cycle and a 90% price crash.
The historical precedent of overleveraged bulls getting trapped during price rallies serves as a warning for the current LINK rally.
It’s important to note that this article does not provide investment advice or recommendations. Each investment and trading decision carries risks, and individuals should conduct their own research before making any decisions.