Optimism (OP) is currently at a critical juncture. After forming a head-and-shoulders pattern, typically a bearish signal, the asset is nearing crucial support levels. As the price hovers around $1.10, investors are left wondering whether the downtrend will persist or if a reversal is imminent.

Head-and-Shoulders Pattern Points to Downside

The formation of a head-and-shoulders pattern in the chart has raised concerns about further downside for OP. The left shoulder peaked at $2.70, the head formed near $4.50, and the right shoulder completed below $2.50. The price has since dropped below the key $1.10 level, breaching the neckline of the pattern, which suggests that OP could continue its downward trajectory.

If this breakdown is confirmed, OP may test lower support levels, possibly approaching $0.80 or even lower. However, if the pattern fails to fully materialize, there is a chance for a short squeeze that could push OP back above $1.50, especially as bears are forced to cover their positions.

Bearish Sentiment and Profitability

Despite the recent price drop, a significant portion of OP holders remain in profit. According to on-chain data, 54.89% of holders are still in profit, while 40.17% are out of the money. This indicates that many investors may hold onto their positions, limiting the risk of a mass sell-off.

However, the concentration of at-the-money positions around $1.01 suggests that traders who are currently breaking even could soon start seeing losses if the price fails to hold its support. If OP dips below $0.90, capitulation could accelerate, leading to more selling pressure that reinforces the downtrend.

Network Activity Shows Mixed Sentiment

OP’s network activity over the last 15 hours presents a mixed picture. On one hand, active addresses have increased by 7.38%, signaling that existing users remain engaged with the project. However, new addresses have declined by 16.68%, reflecting lower user adoption and interest. Moreover, the number of zero-balance addresses rose by 10.85%, indicating that some wallets may have been liquidated or are inactive.

The drop in new addresses and rise in inactive wallets are patterns often seen during bearish phases, where declining user interest is correlated with further price consolidation or downward pressure.

Diverging Sentiment in Long/Short Positions

The sentiment between standard and perpetual traders is also diverging. The Long/Short Ratio for normal contracts is fluctuating between 0.85 and 1.15, indicating market indecisiveness. However, the perpetual contracts market shows a stronger bullish bias, with the Long/Short Ratio surpassing 2.60. This could suggest that a significant number of traders are positioned for a price bounce, but the high ratio also increases the risk of liquidations. If OP continues its downward trend, liquidations in the perpetual contracts market could trigger a sharp correction, driving prices even lower.

Rising Supply and Declining Price

Over the past year, OP’s circulating supply has increased by 69.27%, now reaching 1.62 billion tokens. This sharp rise in supply, coupled with a declining price, indicates that sell pressure may be outweighing demand. In such cases, the market struggles to absorb the increased supply, which could extend the downtrend unless accumulation picks up again. If demand fails to catch up with the rising supply, OP could face further corrections and potentially drop below the $1.00 mark.

Conclusion: What’s Next for Optimism?

Optimism’s future largely depends on how it responds to the key support levels and whether the bearish momentum can be reversed. The formation of a head-and-shoulders pattern, combined with declining network activity and a rising supply, suggests a continued downtrend unless significant buying pressure emerges. However, if accumulation resumes and the price manages to hold above key support levels, a reversal could be possible. Traders should stay vigilant, as OP’s fate will likely be determined by whether the bears maintain control or if bulls step in to stabilize the market.