DeFi token Aave faces major correction after soaring 100% in a month

The price of Aave (AAVE) has more than doubled in a month, but its bullish momentum could be reaching a point of exhaustion.

AAVE price tests key inflection level

Notably, AAVE has surged by over 103% after bottoming out locally at $45.60 on June 18, hitting almost $95.50 this July 15. Nevertheless, the token’s sharp upside retracement move has brought its price closer to the level that triggered equally sharp pullbacks since early June.

In other words, AAVE has been testing an ascending trendline resistance that constitutes a “bear flag,” a bearish continuation pattern. For example, the trendline’s previous test on July 9 ended up in a 20% downside move. Similarly, a similar attempt on June 24 pushed AAVE price lower by nearly 30%.

AAVE/USD daily price chart. Source: TradingView

As a result of this distribution behavior, AAVE’s ongoing attempt to break above the flag trendline could meet with extreme selling pressure. A pullback could then see AAVE/USD retest the flag’s lower trendline near $67.75 as its downside target by September, down almost 30% from July 15’s price. 

Meanwhile, the $76.30-level serves as interim support, primarily due to its history as a price floor in May that preceded a 60% rebound move.

Bear flag breakdown scenario

As a rule of technical analysis, the breakdown below $67.75 could see AAVE plunging by as much as the height of the “flagpole” that formed before the bear flag. That would have the token eye $35.50 as its bear flag profit target, down over 60% from the current price.

AAVE/USD daily price chart featuring ‘bear flag’ breakdown setup. Source: TradingView

Conversely, a continued rebound move above the bear flag’s upper trendline would invalidate the breakdown setup. In this case, the bullish target for AAVE will likely be the $115-$120 range that served as resistance in June.

GHO stablecoin

More than half of the gains during Aave’s price rally have come after its proposal to launch a U.S. dollar-pegged stablecoin called GHO.

Related: UNI, MATIC and AAVE surge after Bitcoin price bounces back above $20K

On July 7, Aave Companies, a centralized entity that backs Aave’s lending protocol, requested its community to vote on their “overcollateralized” stablecoin proposal. AAVE’s price surged by over 53% afterward, led by speculations that GHO would boost the DeFi token’s adoption.

However, any further gains would risk pushing AAVE into “overbought” territory with its daily relative strength index (RSI) treading just five points below 70 as of July 15

AAVE/USD daily relative strength index. Source: TradingView

Rising above the 70 threshold could push AAVE’s price into a correction phase, likely triggering the bear flag scenario as discussed above.   

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Every investment and trading move involves risk, you should conduct your own research when making a decision.

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