Terra (LUNA) at risk of 50% drop if bearish head and shoulders pattern plays out

Terra (LUNA) may fall to nearly $25 per token in the coming weeks as a head-and-shoulders (H&S) setup develops, indicating a 50% price drop, according to technical analysis shared by CRYPTOPIKK.

H&S patterns appear when the price forms three peaks in a row, with the middle peak (called the "head") higher than the other two (left and right shoulders). All three peaks come to a top at a common price floor called the "neckline."

Traders typically look to open a short position when the price breaks below the H&S neckline. However, some employ a "two-day" rule where they wait for the second breakout confirmation when the price retests the neckline from the downside as resistance, before entering a short position.

Meanwhile, the ideal short target for traders comes out to be at length equal to the maximum distance between the head and the neckline. In LUNA's case, the price has now been heading toward the same H&S short target, currently near $25, as shown in the chart below.

Meanwhile, the volume recorded during the H&S breakout appears consistent, underscoring that the ongoing downtrend has enough bearish sentiment. This further raises risks of further declines in the Terra market.

LUNA's daily momentum indicators, primarily relative strength index (RSI) and money flow index (MFI), have both entered their respective oversold regions, which some might consider to be a buy signal. CRYPTOPIKK recognized that they could prompt the LUNA price to rebound but said "the trend still seems [to be] heading down."

Where's the bottom?

The bearish outlook appears as the LUNA trades under the pressure of strong macroeconomic catalysts, mainly the U.S. Federal Reserve's decision to unwind its $120 billion a month asset purchasing program entirely by March, followed by the first interest rate hike from its current near-zero levels.

Tightening monetary policies had started hurting assets that had been bullish when these policies were loose. That includes some sections of the U.S. stock market and Bitcoin (BTC). So, LUNA seems to have been tailing Bitcoin's losses against the ongoing market uncertainty, especially as it sits atop a year-over-year profit of 3,200% versus BTC's 11.50% gains.

Related: Defying the bear market, this automated strategy is up 15% so far in 2022

In its short history as a financial asset, LUNA's downtrends have typically come to exhaustion as it tests its 50-week simple moving average (50-week SMA; the blue wave in the chart below) as support. That price floor was near $30 at the press time.

Meanwhile, on the daily timeframe chart, LUNA has been testing its 200-day exponential moving average (200-day EMA) for a potential rebound. Should it happen, LUNA's next upside target appears to be near $75, as shown in the chart above.

Conversely, a decisive move below the 200-day EMA wave may trigger the H&S setup toward $25.

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

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