REN price at risk of 50% drop after bearish trading pattern appears

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2022-01-04 22:33:45

However, the long-term technical setup and consolidating protocol indicators suggest bullish continuation.

The prospect of Ren (REN) continuing a sustained rally to new highs looks slim as a classic bearish reversal pattern begins to emerge.

Called head and shoulders, the setup occurs when price makes three tops, with the middle peak (called the head) longer than the other two described as the left and right shoulders. The bottom of these tops is supported by a neckline.

An illustration of the head and shoulders pattern. Source: Institute of Corporate Finance

This pattern mainly comes into play when price breaks below the neckline in a correction that follows the formation of the right shoulder. That prompts traders to open short-term entries below the neckline, with their ideal aim at a length equal to the distance between the high point of the head and the neckline.

What’s behind REN’s current setup?

REN has been forming a sloping head and shoulders pattern, which is supported by a bullish neckline.

Specifically, the REN price rallied and fell to a bottom around mid-December 2021, forming a left shoulder. It then rallied strongly to make a higher high – above the high of the first shoulder – and then fell again.

REN has since rebounded and is currently in the process of forming its right shoulder, as shown in the chart below.

Daily REN/USD price chart with H&S setup. Source: TradingView

Therefore, REN price could continue to rally until it completes the formation of the right shoulder, possibly close to the 50-day exponential moving average; velvet wave, near $0.67. It was due to the recent history of the wave that limited REN’s price recovery.

Additional selling pressure could also come from the 0.618 Fib line near $0.633 given its historical relevance as both support and resistance. All in all, a pullback looks likely, making REN the right fit. Meanwhile, a correction to the neckline, followed by a break below it, will confirm the head and shoulders setup.

In doing so, the move could move REN’s downside target to $0.30, measured after adding the distance between the top and the neckline to the breakout point. That’s about 50% less than the current trading price of $0.59.

Long-term outlook remains optimistic

REN’s head and shoulders setup comes as part of a broader price correction that has seen the token drop nearly 70% in value from its record high near $1.92 in February 2021.

On the longer time frame chart, REN seems to be just consolidating inside a giant symmetrical triangle, suggesting that a correction towards $0.30 might eventually trigger a rally towards $1.20.

The REN/USD weekly price chart has a symmetrical triangle. Source: TradingView

Bullish signals for REN could also come from the development of its backing company of the same name. Ren’s core product, RenVM, brings interoperability with the decentralized finance (DeFi) ecosystem. It holds users’ digital assets as they move between blockchains using zero-knowledge proofs over an sMPC-based protocol.

REN acts as a link to run so-called Darknodes that power RenVM’s sMPC network. Senders of 100,000 REN can run these Darknodes and as a result can earn rewards in Bitcoin (BTC), Ether (ETH), Zcash (ZEC) and other tokens.

The total key value (TVL) of digital assets minted across all chains – which includes Ethereum, Binance Smart Chain, Solana, Polygon, Fantom, Avalanche, and Arbitrum – by RenVM out is 1.05 $ billion at press time compared to $6.6 million in June 2021.

Multi-year history of volumes and totals locked in RenVM. Source: Highcharts.com

Meanwhile, the total transaction volume through RenVM across all chains reached an all-time high of $8.89 billion on January 4, 2022. That shows a steady increase in the adoption of the Ren network, thus boosting the bullish outlook of the REN token.

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