Avalanche (AVAX) in 'overbought' zone after 100% gains in a week — Correction ahead?

The AVAX/USD exchange rate slips more than 16% after testing its May 2021 resistance level.

Avalanche blockchain platform’s native asset AVAX fell on Thursday as traders decided to secure their profits from its 100% upside move.

The AVAX/USD exchange rate plunged more than 16% after hitting a three-month high of $36.64, putting a brake on a seven-day upside boom that saw its price rising by 111%. It appears that traders felt uneasy about entering AVAX markets near $36 because of its historical reference as a sell-off level (it capped AVAX’s recovery attempts in March-May 2021).

Overvaluation risks

AVAX also dropped on interim overvaluation fears. The Avalanche token’s daily relative strength index (RSI) crossed above 70 during its upside boom. In detail, markets consider an RSI reading above 70 as overbought for the underlying asset, noting that the price has climbed excessively higher and, therefore, should undergo a correction.

Avalanche (AVAX/USD) daily price chart. Source: TradingView.com

More evidence for AVAX’s interim overvaluation appeared out of Bollinger Bands. The indicator consists of a middle band (a 20-period simple moving average) and two outer bands set at two standard deviations below and above the middle band.

When the price overreaches its valuation in the short term, it tends to jump above the upper band. Similarly, slipping below the lower band suggests that the asset is trading below its current valuation. AVAX crossed above the upper Bollinger Band following the latest price rally.

The two indicators were instrumental recently in predicting AVAX price corrections. For instance, during the February 2021 rally, wherein the Avalanche token surged over 500% in just two weeks, its RSI and Bollinger Bands both alerted about its excessive interim valuation.

Avalanche momentum indicators alert overbought risks. Source: TradingView.com

The price wiped 65% of its gains in the next three weeks to neutralize its overbought status. Its next interim support came at the 23.6% Fib line ($22.29) of the Fibonacci retracement graph drawn between the $63.3 swing high and $9.62 swing low.

The same 23.6% Fib level now serves as the next line of support should the AVAX price corrects owing to its RSI and Bollinger Bands alerts.

Fundamentals

The latest bout of Avalanche price boom appeared in the wake of the launch of its $180 million “liquidity mining incentive program” to bring decentralized finance (DeFi) services to its blockchain platform, including lending platform Aave and automated market protocol Curve Finance.

Related: Avalanche Rush to give out more than 180M in DeFi incentives

AVAX’s bounce also appeared as a rally in its top rival Ethereum’s market flattened out. This is because traders tend to rotate capital out of overvalued markets to bet on assets they deem undervalued.

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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