The strong rebound movement seen in the Aave (AAVE) market over the past three days has increased its upside potential in May, a technical indicator suggests.
AAVE Price Bounces Off Key Support
Called a “rising wedge,” the pattern appears when price rises within a range defined by two rising and contracting trend lines. It usually resolves after the price breaks below the lower trend line on some convincing rising volumes.
The AAVE token has been painting a similar ascending channel since early February 2022. The AAVE/USD pair has bounced in recent days after testing the lower trend line of the wedge as support. This means that the bulls are now eyeing the upper trend line of the pattern near $280, over 40% of the current price.
The bullish target also coincides with the level that has acted as resistance between November 2021 and January 2022. It has also been decisive in stopping AAVE’s bearish attempts during July-October 2021.
Levels to watch in case of a “bull trap”
As noted above, many traditional analysts consider rising wedges to be bearish reversal patterns. This indicates that AAVE’s rally to $280 might not turn into a full-fledged bull run. Instead, the probability of the token correcting lower seems higher.
Furthermore, AAVE price could take an early pullback after reaching its 200-day EMA (200-day EMA; the blue wave on the chart above) near $208, which suggests an imminent breakout to the downside.
As a general rule, the breakout of a rising wedge causes the price to fall to a target which is measured by adding the distance between the upper and lower trend lines of the pattern to the breakout point.
Therefore, depending on the level at which AAVE breaks out of its rising wedge, the downside target becomes $105 and $124 by the end of Q2.
Levels to watch in case of a “bull flag”
If we turn to the weekly charts, AAVE is in a month-long descending channel pattern that looks like a “bull flag”.
Bull flags are bullish continuation indicators that appear when price consolidates lower within a parallel range after a period of strong uptrend.
In theory, they are resolved after the price breaks above the upper trend line of the range decisively, followed by an extended up move equal to the height of the previous rally (called an antler).
The bull flag scenario now puts AAVE at risk of testing the lower trend line of the setup near $109, which coincides with its 200-week EMA. Interestingly, the level is also close to the interim downside target of the rising wedge, as discussed above.
But the flag setup indicates that the AAVE’s long-term trend is up. Therefore, the pair could bounce from the lower trendline to a bullish flag target of about $900 in 2022-2023, 400% higher than the current price.
Conversely, a decisive break below the 200-day EMA could expose AAVE to fresh selling, with the next downside target near $72, a historic support/resistance level.
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