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Avalanche (AVAX) in overbought zone after 100% gains in a week - Correction ahead?


20 Aug 2021

#Avalanche

The AVAX/USD exchange rate slips more than 16% after testing its May resistance level. The Avalanche blockchain platform's native asset, AVAX, fell on Aug. 19 as traders decided to secure their profits from its 100% upside move. The AVAX/USD exchange rate plunged more than 16% after hitting a three-month high of $36.64, putting the brakes on a seven-day upside boom that saw its price rise by 111%. It appears that traders felt uneasy about entering AVAX markets near $36 because of its historical reference as a sell-off level, capping AVAX's previous recovery attempts from March to May.

Overvaluation risks

AVAX also dropped on interim overvaluation fears. The daily relative strength index (RSI) of Avalanche's token crossed above 70 during its upside boom. Essentially, markets consider an RSI reading above 70 as overbought for the underlying asset, noting that the price has climbed excessively higher and, therefore, should undergo a correction.

More evidence for AVAX's interim overvaluation appeared when looking at the Bollinger Bands. The indicator consists of a middle band (a 20-period simple moving average) and two outer bands set at two standard deviations below and above the middle band.

When the price overreaches its valuation in the short term, it tends to jump above the upper band. Similarly, slipping below the lower band suggests that the asset is trading below its current valuation. AVAX crossed above the upper Bollinger Band following the latest price rally. The two indicators were instrumental in predicting recent AVAX price corrections. For instance, during the February rally where AVAX surged over 500% in just two weeks, its RSI and Bollinger Bands both alerted t its excessive interim valuation.

The price wiped off 65% of its gains in the next three weeks to neutralize its overbought status. Its next interim support came at the 23.6% Fibonacci line ($22.29) of the Fibonacci retracement graph drawn between the $63.3 swing high and $9.62 swing low. The same 23.6% Fibonacci level now serves as the next line of support should the price of AVAX correct following its RSI and Bollinger Bands alerts.

Fundamentals

The latest bout of AVAX's price boom appeared in the wake of the launch of its $180 million “liquidity mining incentive program” to bring decentralized finance (DeFi) services to its blockchain platform, including lending platform Aave and automated market protocol Curve Finance.

AVAX's bounce also appeared as a rally in the market of its top rival, Ether (ETH), flattened out. This is because traders tend to rotate capital out of overvalued markets to bet on assets they deem undervalued.


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