Polygon price risks 50% drop as MATIC paints inverted cup and handle pattern

The bearish technical setup has a success rate of 62% of meeting its downside price targets.

Polygon (MATIC) has dropped by more than 40% from its record high of $2.92, established on Dec. 27, 2021. But if a classic technical indicator is to be believed, the token has more room to drop in the sessions ahead.

MATIC price chart painting classic bearish pattern

MATIC's recent rollover from bullish to bearish, followed by a rebound to the upside, has led to the formation of what appears like an inverted cup and handle pattern — a large crescent shape followed by a less extreme upside retracement, as shown in the chart below.

MATIC/USD three-day price chart featuring inverted cup and handle pattern. Source: TradingView

In a "perfect" scenario, inverted cup and handle setups set the stage for a downturn ahead. As they do, the price tends to fall towards levels that are at length equal to the maximum distance between the setup's top and bottom, when measured from the breakout level.

Therefore, if MATIC breaks bearish out of its "handle" range, i.e., a drop accompanied by an increase in volumes, it may fall toward $0.86, nearly 50% below its current prices, in the future.

Polygon bullish scenario

Polygon's extremely bearish outlook emerged amid a broader crypto market correction in 2022.

Top tokens Bitcoin (BTC) and Ether (ETH) trimmed nearly 11% and 22% off their market valuations year-to-date. Their plunge also triggered similar downside moves elsewhere in the crypto market, with its overall valuation falling to $1.878 trillion on Feb.11 from $2.190 trillion at the beginning of this year.

Polygon's market capitalization dropped to $12.96 billion from $18.10 billion, with MATIC's per token price plunging over 30% to $1.734 in the same period. Nonetheless, a technical support confluence kept the token's bullish hopes alive.

In detail, two support levels in the form of MATIC's 200-day exponential moving average (200-day EMA; the blue wave in the chart below) and a multi-month upward sloping trendline (purple) helped MATIC limit its bearish bias.

MATIC/USD daily price chart featuring its key support levels. Source: TradingView

The Polygon token has been again testing the support confluence for a potential price rebound ahead. However, it appears that an upside retracement would have MATIC retest th imminent resistance level above in the form of a negative sloping trendline (blacked).

As a result, a bullish setup could emerge only on a decisive rebound, i.e., price rising alongside trading volumes.

If not, MATIC would risk validating the inverted cup and handle pattern above which, according to veteran analyst Tom Bulkowski, has a 62% success rate.

Strong on-chain data

MATIC serves as the currency of the Polygon ecosystem with its primary use cases involving fees and staking. Users can choose Polygon for its ability to process Ethereum transactions faster and at a cheaper rate.

Related: Polygon raises $450M in Sequoia-led funding round

For that reason, Polygon's daily active addresses (DAA) now averages around 300,000 a day compared to 759 a day at the beginning of 2021, according to data provided by PolygonScan.com.

Polygon daily active addresses. Source: PolygonScan.com

Analysts at Panther Research considered a rising DAA as bullish for MATIC, citing Ethereum as their benchmark, the increasing DAA of which has been correlating with a rise in ETH prices.

Ethereum active addresses. Source: Glassnode

As they explained in an excerpt from their note:

"Given how closely Ethereum’s network adoption and Polygon’s are related, coupled with the fact that Polygon’s PoS Sidechain is set to overtake moving forward and as more solutions are deployed by L1s, it would be reasonable to anticipate that the MATIC token is set to gain value in time to come."

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