DOT rallies 12% in a day as Polkadot gears up to solve a major blockchain hacking problem

But the token still risks falling by more than 30% based on a classic bearish continuation setup.

Polkadot (DOT) price ticked higher in the past 24 hours on anticipations that its new cross-chain communications protocol would solve a long-standing problem in the blockchain sector.

DOT price gains 12% on XCM launch

Bulls pushed DOT's price to $16.44 on May 5 from $14.72 a day before, gaining a little over 12% as they assessed the launch of XCM, a messaging system that allows parachains — individual blockchains that operate in parallel inside the Polkadot ecosystem — to communicate with each other.

As Cointelegraph reported, future updates in the XCM protocol would see parachains exchanging messages without relying on Polkadot's central blockchain, the Relay Chain. That expects to eliminate bridge hacks that have cost the industry more than $1 billion in a year.

Other bullish catalysts

DOT's gains also appeared in line with similar upside moves elsewhere in the cryptocurrency market.

For instance, Bitcoin (BTC) rallied nearly 6% in the same period DOT climbed 12% with their correlation coefficient at 0.87 as of May 5, suggesting that BTC and DOT's prices are moving almost in lockstep in recent days.

The crypto market gained after Federal Reserve clarified that it would not increase benchmark rates by a 75 basis point, as propagated by one of its presidents, James Bullard, in April 2022. The S&P 500 index, too, rallied by nearly 3%, and bond yields fell.

Nonetheless, the U.S. central bank remained on its path to cutting interest rates, hoping to get near the 2%–3% “neutral” while preparing for a "softish" landing, i.e., curbing inflation without overly impacting the U.S. economic growth.

On May 4, it began with a 50 bps cut, with chairman Jerome Powell promising more 0.5% increments.

As a result of this hawkish tone, Bitcoin's current price rebound could fizzle out once more short of $40,000, taking down the rest of the crypto market with it, DOT included.

Polkadot price risks 35% decline 

Polkadot technicals put it at risk of a correction in the short term as it breaks below a head-and-shoulders (H&S) pattern.

H&S patterns appear when the price forms three peaks while gaining support from a common support level, called a neckline. Meanwhile, the middle peak (head) comes to be taller than the other two (left and right shoulder), which are more or less of the same height.

H&S typically resolve after the price breaks below its neckline. As a rule of technical analysis, a H&S breakdown sends the price to level at a length equal to the maximum distance between the head's peak and neckline. 

Related: Bitcoin trader keeps $40.8K BTC price target amid warning over risk asset 'pain trade'

DOT is in the breakdown stage of its prevailing H&S setup, with its recent bounce testing the neckline as support to reconfirm the bearish pattern.

Meanwhile, the neckline area coincides with the 50-day exponential moving average (50-day EMA; the red wave in the chart below) at $18.20, which sets up a potential pullback scenario following the next upside attempt.

Polkadot's H&S downside target is near $11 if the breakdown continues, almost 35% lower than May 5's price.

Conversely, a decisive breakout above the neckline area and the 50-day EMA would have DOT eye its 200-day EMA (the blue wave) near $22.75 as the upside target.

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