Terra (LUNA) plunged significantly after witnessing a FUD attack on its native stablecoin TerraUSD (UST).
The LUNA/USD pair fell 20% between May 7 and May 8, hitting $61, its worst level in three months, after a whale dumped $285 million worth of UST en masse. Following this sell-off, UST briefly lost its peg to the US dollar, falling to $0.98.
Excess supply of LUNA
LUNA serves as a collateral asset to maintain the dollar peg of the UST, in accordance with Terra’s elastic monetary policy. Therefore, when the value of UST is greater than $1, the Terra protocol prompts users to burn LUNA and create UST. Conversely, when the price of UST falls below $1, the protocol rewards users for burning the UST and hitting the LUNA.
Therefore, during the reduction in the UST supply, the valuation of LUNA should decrease. Similarly, when the supply of UST increases, the valuation of LUNA increases, notes Will Comyns, a researcher at Messari.
The chart below shows a continued downward trend in the daily supply of UST, coinciding with a relative increase in the daily supply of LUNA. On May 8, the UST market contracted for the first time in two months, dropping 28.1 million below zero. Simultaneously, LUNA’s supply increased to more than 436.75 million above zero.
Excessive daily supply relative to what appears to be declining or stable market demand may have pushed the price of LUNA lower.
More pain for Terra to come?
Terra’s continued price decline prompted LUNA to retest a support confluence consisting of its 50-day exponential moving average (50-day EMA; the red wave) near $56 and an upward sloping multi-month trendline .
Interestingly, the ascending trendline forms an ascending wedge pattern in conjunction with another ascending trendline above it. Rising wedges are bearish reversal patterns, so their appearance on Terra’s weekly chart suggests that a bigger decline is likely.
As a general rule of technical analysis, a rising wedge breakdown pushes price down by as much as the maximum distance between the upper and lower trendline of the pattern.
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So, if LUNA breaks below its corner of its current support confluence, accompanied by an increase in volumes, its price would likely fall to around $22.50, down more than 60% from the price of today.
Conversely, a rebound from the confluence of support would position LUNA for a rally towards the upper trendline of the wedge – above $130, a new all-time high.
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