Terra’s elastic monetary policy uses LUNA as a collateral asset to keep the currency peg at UST. The Terra protocol incentivizes users to burn LUNA and mint UST when the value of UST exceeds $1.00. When the price of UST falls below $1.00, the system compensates users who burn UST and mint LUNA.
When a result, LUNA’s value should fall as UST supply is reduced. Similarly, if UST’s supply grows, LUNA’s value rises, according to Will Comyns, a Messari researcher.
The data below illustrates an ongoing downward trend in daily UST supply, which corresponds to an increase in daily LUNA supply. For the first time in two months, the UST market contracted on May 8, falling by 28.1 million below zero. Simultaneously, LUNA’s supply increased by more than 50%.
LUNA retested a support combination comprised of its 50-day exponential moving (50-day EMA; the red wave) near $56 and a multi-month upwards rising linear trend in response to Terra’s continuing price fall.
The ascending trendline, in conjunction with some other upward trending line above, forms a rising wedge pattern. Because rising wedges are negative reversion setups, their presence on Terra’s weekly chart indicates that additional downside is likely.
A rising wedge breakdown, according to technical analysis, pushes the price lower by the maximum distance between the structure’s upper and lower trendlines.
As a result, if LUNA falls below its wedge from its current support confluence, accompanied by an increase in volumes, it risks falling to about $22.50, a drop of more than 60% from its current price.
A bounce from the support confluence, on the other hand, would put LUNA in position for a run up to the wedge’s upper trendline and a new high above $130.