SOL price gained 75% in the past two months, but technical analysis suggests it could be an elaborate bull trap.
Solana (SOL) price rallied by approximately 75% two months after bottoming out locally near $25.75, but the token's splendid upside move is at risk of a complete wipeout due to an ominous bearish technical indicator.
Dubbed a "head-and-shoulders (H&S)," the pattern appears when the price forms three consecutive peaks atop a common resistance level (called the neckline). Notably, the middle peak (head) comes to be higher than the other two shoulders, which are of almost equal height.
Head and shoulders patterns resolve after the price breaks below their neckline. In doing so, the price falls by as much as the distance between the head's peak and the neckline when measured from the breakdown point, per a rule of technical analysis.
It appears SOL has been forming a similar bearish setup on its longer-timeframe charts.SOL/USD weekly price chart featuring H&S breakdown. Source: TradingView
On the weekly chart, the token has been forming the right shoulder of the overall pattern, suggesting a correction toward the neckline at $27 during the second half of 2022. Meanwhile, a breakdown below $27 could result in an extended correction toward $2.80.
In other words, a 95% price decline by the end of 2022 or early 2023, a setup also projected by pseudonymous analyst "PROFIT BLUE."
Solana's extremely eerie bearish setup appears as it closely tails trends across risk-on markets, mainly driven by the Federal Reserve's hawkish response to inflationary pressures.
For instance, SOL closed the week ending Aug. 14 at a 10.5% profit, similar to Bitcoin (BTC) and the benchmark S&P 500 index. These markets reacted to a softer-than-anticipated U.S. consumer price index (CPI), raising possibilities that the Fed would slow the pace of its interest rate hikes.SOL/USD and S&P 500 daily correlation coefficient. Source: TradingView
But many analysts have warned about these ongoing price rallies in the risky corners of the market, citing pieces of historical evidence of similar bear market bounces. So, SOL's 75% rebound risks turn into a fakeout if its correlation with riskier assets remains positive.
From a fundamental perspective, Solana also faces extreme FUD due to its recurring network outages and rumored centralization. However, the project's backers have introduced new upgrades to fix these issues, as Cointelegraph discussed.
But even then, a 95% price crash is too "wild," suggests market analyst IncomeSharks, saying that it would mean Solana is a rug pull project like Terra (LUNA) — now Terra Classic (LUNC).
The next big drop could have SOL explore bounce opportunities near a multi-year ascending support trendline, as shown below.SOL/USD daily price chart. Source: TradingView
In other words, SOL's bearish continuation could last until its price hits $20, down over 55% from August 16's price.
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