SOL forms first death cross – what’s next?

SOL appears poised to form its first death cross this week, raising fears the sell-off will continue into February.

Real risk of sell out

Notably, the 50-day exponential moving average (50-day EMA, red wave) is about to close below the 200-day EMA (blue wave), signaling a death cross – a bearish signal. ), which often prompts dealers to sell.

Daily USD price chart and overlap EMA50-200 | Source: TradingView

The threat emerged as SOL ended January down nearly 50%.

As of the last day of the month, the token is down more than 2.5% to nearly $91, compared to nearly $180 at the start. Meanwhile, the catalysts that caused the price drop remain intact.

The SOL fell in January as traders tried to gauge how long the Federal Reserve would raise its benchmark interest rate from near zero in a bid to tame booming inflation and tighten the labor market. As a result, Solana lost half of its market valuation from $55.19 billion to $28.79 billion in January after ending 2021 with a whopping 11.144% gain.

This has prompted some financial experts suspect “Crypto Winter” in the near future. The term refers to declining market cycles such as the 2018 cycle, which saw the total market cap of digital assets decline by more than 80%.

For now, SOL’s preliminary bullish outlook still points to a hold above $83 – the current support level. A break of the above floor could open a slide to $65 as illustrated in the chart below.

Daily USD price chart and temporary support targets | Source: TradingView

Both levels of support were instrumental in the SOL/USD pair hitting record highs above $260 last year.

Philip Gunwhy, Partner at Blockasset.co, remains bullish on SOL in the long-term as the network’s exponential growth in DeFi and NFT sectors tends to drive token demand. However, the analyst noted that SOL’s ability to recover quickly in the short-term depends on the performance of the broader crypto ecosystem.

“For SOL, maintaining solid support in the $65-$85 range is definitely the main focus for the week, while the longer-term focus is to retest all-time highs around $260,” Gunwhy said.

Recovery scenario

There is no previous data showing how SOL traders are reacting to the death cross as this will be the token’s first 50-200 day EMA bearish cross to date. But considering how they’ve traded Bitcoin over the past few years, you can see that the death cross has had little impact.

For example, in June 2021, the Bitcoin market 50-200-day EMA crossover pushed the price to $29,000. But a month later, BTC rallied strongly, eventually hitting an all-time high of $69,000 in early November 2021.

Daily BTC/USD price chart and last death crosses | Source: TradingView

Similarly, death crosses on the S&P 500 (SPX) chart have not made much sense over the past decade due to false bearish alerts. For example, the last two bearish crossovers between the SPX 50-day EMA and 200-day EMA in December 2018 and March 2020 led to a bottoming, after which the price rallied strongly.

Daily S&P 500 price chart and last death crosses | Source: TradingView

This increases the likelihood of the SOL death cross triggering a bottom in the coming sessions, followed by a sharp reversal. As such, the SOL token could converge on previous support/resistance levels for a potential rally to the 200-day EMA.

Daily USD price chart and recovery scenarios | Source: TradingView

The SOL Price Relative Strength Index is also bullish as it is a classic buy signal.

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