The price of Polkadot (DOT) has risen in the last 24 hours on expectations that its new cross-chain communications protocol will solve a long-standing problem in the blockchain network sector.
DOT Price Gains 12% Following XCM Launch
The bulls pushed DOT price to $16.44 on May 5 from $14.72 the day before, gaining just over 12% as they priced in the launch of XCM, a messaging system that enables parachains – individual blockchain networks that operate in parallel within the Polkadot ecosystem- communicate with each other.
As Cointelegraph reported, future updates to the XCM protocol would allow parachains to exchange messages without relying on Polkadot’s core blockchain, the Relay Chain. This is expected to eliminate bridge hacks that have cost the sector more than a billion dollars in a year.
Other Bullish Catalysts
DOT’s gains also appear to be in line with similar moves higher elsewhere in the cryptocurrency market.
For example, Bitcoin (BTC) is up almost 6% in the same period DOT is up 12%, with a correlation coefficient of 0.87 as of May 5, suggesting that BTC and DOT prices are moving almost in unison in recent days.
The cryptocurrency market gained after the Federal Reserve made it clear that it would not raise benchmark interest rates by 75 basis points, as one of its presidents, James Bullard, said in April 2022. Also the S&P 500 index rose almost 3%, and bond yields fell.
However, the US central bank continued on its path of interest rate cuts, hoping to get closer to the “neutral” 2-3% while preparing for a “soft” landing, that is, to curb inflation without excessively affect the economic growth of the United States.
On May 4, it began with a 50 basis point cut, with Chairman Jerome Powell promising more increases of 0.5%.
As a result of this aggressive tone, the current Bitcoin price bounce could once again fade below $40,000, dragging the rest of the cryptocurrency market with it, including DOT.
Polkadot price is at risk of falling by 35%
Polkadot’s technicals put it at short-term correction risk as it breaks below a head and shoulders (H&S) pattern.
H&S patterns appear when the price forms three peaks while resting on a common support level, called the neckline. Meanwhile, the central peak (head) becomes taller than the other two (right and left shoulder), which are about the same heights.
H&S patterns usually resolve after the price breaks below the neckline. As a rule of technical analysis, a breakout of H&S sends the price to the level by a length equal to the maximum distance between the peak of the head and the neckline.
DOT is in the downside breakout phase of its prevailing H&S setup, with its recent bounce testing the neckline as support to reconfirm the bearish pattern.
Meanwhile, the neckline coincides with the 50-day exponential moving average (50-day EMA; the red wave on the chart below) at $18.20, setting up a possible retracement scenario after the next upside attempt.
The downside target on the Polkadot H&S is near $11 if the breakout continues, almost 35% below the current price.
Conversely, a decisive break above the neckline and the 50-day EMA would see DOT targeting its 200-day EMA (the blue wave) near $22.75 as an upside target.
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