AAVE: Could the Head and Shoulders Mean Further Decline?

AAVE Head and Shoulders Decline
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AAVE Head and Shoulders Decline

Aave is one of the leading decentralized finance (DeFi) protocols that enables users to earn interest on supplying and borrowing crypto assets. Aave has its native token, AAVE, used for the governance and security of the protocol.
However, Aave’s price performance has been under pressure lately as the protocol faces increased competition from other DeFi platforms and regulatory uncertainty from authorities. Aave’s price chart shows a fully formed head and shoulders pattern.

Source: AAVE/USD on TradingView (Daily Time Frame)

A head and shoulders pattern is a technical indicator that consists of three peaks, where the middle peak (the head) is higher than the other two (the shoulders), and a neckline that connects the lows between the peaks. The pattern signals that the bullish momentum is losing strength and that the sellers are gaining control. As most traders know, the pattern is confirmed when the price breaks below the neckline and closes below it. We can calculate the target price for the pattern by subtracting the height of the head from the neckline.

Aave Head and Shoulders Decline: Structure Breakdown

The chart shows Aave’s daily price action from July to August 2023, with the left shoulder (first shoulder) formed on July 4th, when Aave reached $81.15. The middle peak level (the head) was formed on July 14th, when Aave reached $86.86. Unironically, the head was created because of the price reaction to the resistance zone, which we were cautious of as per our previous analysis. The right shoulder (second shoulder) was formed on July 30th, when Aave failed to surpass the last high and reached $75.08.
The neckline was drawn by connecting the lows of $69.06 on July 11th and $68.26 on July 24th.

Source: AAVE/USD on TradingView (Daily Time Frame)

At the end of July, Aave’s price had already broken below the neckline support, triggering a sharp sell-off that pushed the price lower to about $61.59. However, the sell-off was briefly stalled by buyers, who mounted little pressure and took the price a little higher, creating a pause. However, upon approaching the neckline, which is now acting as a minor resistance level, the buying pressure faltered, meaning it was merely a pullback. The price has been on a gradual decline since then.

Trade Opportunities

Admittedly, the head and shoulders pattern has conveniently fallen into place. Both areas where entries can be opened have been validated (i.e., at the break of the neckline support and the pullback). This event has confirmed powerful selling potential, especially concerning the weekly time frame, as pointed out in our previous analysis.

Source: AAVE/USD on TradingView (Weekly Time Frame)

All that we’ve discussed is part of the internal structure of the weekly time frame, on which a descending triangle is gradually forming. We can take a short-sell considering the significant support level at $49.20.

Featured image: Shutterstock

Disclaimer: The information on AlteBlock reflects the authors’ personal opinions. It does not represent AlteBlock’s opinions on whether to buy, sell, or hold specific investments. It is suggested that you conduct your own research before making any investment decisions. You use the information at your own risk. See Disclaimer for additional details.

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