Cardano risks facing massive declines even as ADA rebounds 5%

• ADA/USD pair added 5% gains in the early morning trading session on Wednesday.
• Despite the upside move, Cardano’s native blockchain asset risks dropping significantly.
• A bearish technical setup is playing spoilsport.

JAIPUR (CoinChapter.com) – Cardano’s native blockchain asset risks trimming gains significantly on the back of a bearish technical setup formation, despite the ADA/USD pair registering 5% gains in the ongoing trading session on Wednesday.

Related: Cardano enters the smart contract scene only to lose 20%; declining DeFi sector to blame?

Head And Shoulders

ADA’s bearish indication comes on the heels of a head and shoulders pattern formation. A head and shoulders setup normally shows up with three peaks. The first and third peaks usually have similar heights, with the middle one being the highest. In detail, a head and shoulders chart formation predicts a bullish-to-bearish trend reversal.

Related: Cardano partners with Oasis Pro, Chainlink, Dish Network and gets in the NFT race, but ADA is lagging.

Amongst the most reliable trend reversal patterns, the head and shoulders pattern is one of the most reliable ones. Moreover, it is one of several top patterns that signal that an upward trend is nearing its end with varying accuracy.

Twitter-based crypto price action trader, TraderXO pointed out ADA’s head and shoulders-led bearishness in a recent tweet accompanied by the below chart.

“$ADA

H&S – been a while since I pulled one of these out

Disclosure: I’m an early stage investor in Cardano shorts since the highs. Still riding 50% down

Thanks”

said TraderXO

But besides technical indicators, the ADA/USD pair’s near-term bearishness also stands on a fundamental foundation.

Cardano’s Alonzo Happened But When Utility?

Cardano officially activated its smart contracts functionality through the much-anticipated Alonzo hard fork on September 12, 15:00 Pacific Time. But even with the critical blockchain upgrade that allows developers to deploy Plutus-powered smart contracts on Cardano, the network hasn’t quite become the “Ethereum-killer” it claimed previously.

As per data pulled from Vercel, Cardano is running only 26 Plutus-powered smart contracts. The vast majority (7078 in total) are timelock scripts for minting various tokens and NFTS. These are not full-fledged decentralized applications (Dapps) as smart contracts cannot be time-locked.

Even with Alonzo being a significant milestone, sustained and incremental Dapp and DeFi development on Cardano will take some more time. With 168, Ethereum still tops the list of monthly active developers (MAD). Traders assessed the same and resorted to fast selling after the hard fork event. As a result, the ADA/USD pair dropped 6% from $2.8 to $2.3 on September 13.

Related: Cardano (ADA) drops 6% after smart contract deployment; what’s next?

ADA/USD Technical Setup

The ongoing buying pressure supported by oversold conditions could lead the ADA/USD pair to retest the Descending Channel’s upper trendline at $2.3. But TraderXO’s head and shoulders effect would still return to dictate the pair’s future momentum.

In case of a downturn, ADA risks dropping down to $1.23. The degree of the said drop is equivalent to the height of the head and shoulders pattern from the baseline at $1.96 to the recent all-time high at $3.06. Therefore, ADA/USD’s drop to $1.23 is the worst-case scenario, leading to buyers pumping the pair again in oversold conditions.