Chainlink (LINK) has experienced a remarkable surge in price, rising by approximately 40% in the past week to reach $19.75, its highest level in two years. This impressive increase can be attributed to three key factors that have instilled confidence in investors and stimulated buying activity.
One significant factor contributing to the rise in LINK’s price is the activation of previously dormant wallets. The “Age Consumed” metric has witnessed the highest recorded spike as old LINK tokens are reintroduced into circulation. This sudden deployment of tokens has played a role in driving up the price, as evidenced by the rebound in Chainlink supply held by entities with over 10,000 LINK tokens. This suggests that wealthy traders are accumulating the cryptocurrency.
Furthermore, data from Lookonchain reveals that 47 new wallets have withdrawn a substantial amount of LINK, totaling 2.23 million tokens worth $42.38 million, from Binance since February 5. This withdrawal activity indicates a growing trend among traders to hold onto their LINK tokens amidst the price gains.
However, a closer examination of LINK’s weekly chart reveals a potential bearish divergence, which raises concerns about a potential trend reversal. The chart shows a disparity between the rising prices and the declining relative strength index (RSI), indicating that the momentum behind the buying pressure is weakening over the long term. Additionally, the RSI is nearing 70, the threshold for overbought conditions, which typically increases the risk of correction for the underlying asset.
These bearish technical signals for LINK are further reinforced as its price approaches the support-turned-resistance trendline around the $19.50 level. Historical data suggests that when this trendline has been tested as resistance in the past, it has initiated broader correction periods. Consequently, if LINK fails to decisively break above $19.50, there is a high likelihood that it will fall 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 a historical support level.
On the other hand, if LINK manages to break above $19.50, it could potentially rally towards its 0.382 Fibonacci line at $23.50.
Another concerning factor is the alarmingly high open interest (OI) in LINK’s derivatives market. As of February 6, the net worth of LINK’s outstanding derivative contracts reached a record-high of $592.29 million. This surge in OI, coupled with the positive funding rate, suggests a bullish market sentiment and increased demand for long positions. However, it also raises the risk of liquidation if the market experiences a downturn.
The historical performance of LINK’s OI serves as a cautionary tale. In April 2021, the OI reached $521.25 million with positive funding rates, but the optimism quickly turned sour as LINK’s price peaked at around $54.40 in May 2021, leading to a bear cycle and a 90% price crash. This reversal trapped many bulls and resulted in significant losses. Therefore, there is a risk that the ongoing price rally could trap overleveraged bulls, similar to what occurred in the past.
It is important to note that this article does not provide investment advice or recommendations. Investors should conduct their own research and analysis before making any investment decisions.