Terra (LUNA) tumbled after witnessing a FUD attack on its native stablecoin TerraUSD (UST).
The LUNA/USD pair fell 20% between May 7 and May 8 to hit $61, its lowest level in three months, after whales dumped $285 million worth of UST. As a result of this sell-off, UST briefly lost its peg to the dollar, falling to a low of $0.98.
Too much supply of LUNA
According to Terra’s flexible monetary policy, LUNA acts as a collateral asset to maintain UST’s peg to the US dollar. Therefore, when UST is worth more than $1, the Terra protocol incentivizes users to burn LUNA and mint UST. Instead, the protocol rewards users for burning UST and minting LUNA when the price of UST falls below $1.
Therefore, LUNA’s valuation should decline during periods of reduced UST supply. Similarly, when the supply of UST increases, so does the valuation of LUNA, notes Messari researcher Will Comyns.
The chart below shows a continuing downward trend in daily UST supply, coinciding with the relative increase in daily LUNA supply. On May 8, the market in UST contracted for the first time in two months, falling below zero at 28.1 million. At the same time, the supply of LUNA has increased by over 436.75 million above zero.
A daily oversupply, while market demand appears to be declining or stabilizing, may have pushed down the price of LUNA.
Will Terra be more painful in the future?
Terra’s continued price decline prompted LUNA to retest a support confluence formed by its 50-day exponential moving average (50-day EMA; red wave) near $56 and a more than one-month-old upward sloping trendline.
Interestingly, the uptrend line combines with another uptrend line above to form a rising wedge pattern. Rising wedges are bearish reversal setups, so their appearance on Terra’s weekly chart suggests more downside is likely.
As a rule of technical analysis, a rising wedge breakdown pushes the price down to the maximum distance between the upper and lower trend lines of the structure.
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Therefore, if LUNA breaks out of the wedge from its current support confluence, with increased volume, its price could fall to around $22.50, a drop of more than 60% from today’s price.
Conversely, a bounce off the support confluence would put LUNA at an uptrend line above $130, a new all-time high.
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