DeFi token AAVE eyes 40% rally in May but 'bull trap' risks remain

A sharp rebound move witnessed in the Aave (AAVE) market in the last three days has raised its potential to rise further in May, a technical indicator suggests.

AAVE price rebounds from key support

Dubbed a "rising wedge," the pattern appears when the price rises inside a range defined by two ascending, contracting trendlines. It typically resolves after the price breaks below the lower trendline with convincingly rising volumes.

AAVE has been painting a similar ascending channel since early February 2022. The AAVE/USD pair has bounced in the past few days after testing the wedge's lower trendline as support. This means the bulls are now eyeing the pattern's upper trendline near $280, up over 40% from April 20's price.

The upside target also coincides with the level that has served as the resistance between November 2021 and January 2022. It was also instrumental in capping AAVE's downside attempts during July-October 2021.

"Bull trap" levels to watch

As noted earlier, rising wedges are considered bearish reversal patterns by many traditional analysts. It indicates that AAVE's run-up to $280 might not transform into a full-fledged bull run. Instead, the likelihood of the token correcting lower appears higher.

Moreover, AAVE's price could also undergo an early pullback after hitting its 200-day exponential moving average (200-day EMA; the blue wave in the chart above) near $208, suggesting an imminent breakdown.

As a rule, a rising wedge breakout results in the price falling to a target that is measured after adding the distance between the patterns' upper and lower trendline to the breakout point.

Therefore, depending on the level at which AAVE breaks down from its rising wedge, the bearish scenario target becomes $105 and $124 by the end of Q2.

Key "bull flag" levels to watch 

Switching to the weekly timeframe charts shows AAVE in a month-long descending channel pattern that looks like a "bull flag."

Bull flags are bullish continuation indicators that surface when the price consolidates lower inside a parallel range after a period of a strong uptrend.

In theory, they resolve after the price breaks above the range's upper trendline decisively, followed by an extended upside move equal to the height of the previous rally (called flagpole).

Related: Aave v3 launch triggers 50% rally from long-term descending channel pattern

The bull flag scenario now puts AAVE at risk of testing the structure's lower trendline near $109, which coincides with its 200-week EMA. Interestingly, the level is also near the rising wedge's interim downside target, as discussed above.

But the flag setup indicates that AAVE's long-term bias is to the upside. Hence, the pair could rebound from the lower trendline to a roughly $900 bull flag target in 2022-2023, up about 400% from April 20's price.

Conversely, a decisive break below the 200-day EMA could expose AAVE to further selloffs, with the next downside target sitting near $72, a historical support/resistance level.

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