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LUNA falls 20% in one day as whale dumps Terra’s UST stablecoin – risk of selloff ahead?

Terra (LUNA) has plummeted significantly after witnessing a FUD attack on its native stablecoin, TerraUSD (UST).

The LUNA/USD pair fell 20% between May 7-8 to hit $61, its worst level in three months after a whale dumped $285 million worth of UST. As a result of this sell-off, UST briefly lost its peg to the US dollar, falling as low as $0.98.

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UST daily price chart. Source: TradingView

Excessive LUNA supply

LUNA serves as collateral to maintain UST’s dollar peg in accordance with Terra’s elastic monetary policy. Therefore, when the value of UST is above $1, the Terra Protocol incentivizes users to burn LUNA and mint UST. Conversely, when the price of UST falls below $1, the protocol rewards users for burning UST and minting LUNA.

Therefore, LUNA’s valuation should decline during the UST supply reduction. Similarly, as UST’s supply increases, LUNA’s valuation increases, notes Will Comyns, a researcher at Messari.

The chart below shows an ongoing downtrend in daily UST supply coinciding with a relative increase in daily LUNA supply. On May 8, UST’s market contracted for the first time in two months, falling 28.1 million below zero. At the same time, LUNA’s supply was expanded by over 436.75 million above zero.

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Daily changing LUNA and UST offer. Source: SmartStake.io

Excessive daily supply against what appears to be declining or stable market demand may have pushed LUNA’s price down.

More pain ahead for Terra?

Terra’s continued price decline prompted LUNA to retest a support confluence composed of its 50-day exponential moving average (50-day EMA; the red wave) near $56 and a multi-month sloping trendline.

Interestingly, the ascending trendline forms an ascending wedge pattern in conjugation with another uptrendline above it. Rising wedges are bearish reversal configurations, so their appearance on Terra’s weekly chart suggests further downside is likely.

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Weekly LUNA/USD price chart with “rising wedge” setup. Source: TradingView

As a rule of technical analysis, a collapse of the rising wedge pushes the price down by as much as the maximum distance between the upper and lower trendline of the structure.

Related: Luna Foundation Guard Acquires Additional 37,863 BTC as Part of Reserve Strategy

Thus, if LUNA breaks below its wedge from its current support confluence, accompanied by an increase in volume, its price risks falling to around $22.50, a fall of over 60% from today’s price.

Conversely, a rebound from the support confluence would position LUNA for a rise towards the upper trendline of the wedge – above $130, a new record high.

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