Polygon (POL) has recently formed a bullish pattern on its price chart, signaling a possible uptrend. However, despite these encouraging signs, there are multiple factors at play that could limit the price’s potential. As activity on the network dips and buying momentum wanes, traders and investors should approach with caution before diving in.

A Bullish Flag Emerges, but the Path Forward is Uncertain

At first glance, the chart of Polygon’s POL token appears to be setting up for a breakout. The four-hour chart has drawn attention by forming a “bull flag,” a chart pattern often indicative of a potential upward movement. POL, currently priced at $0.655, has seen an 11% gain in the last 24 hours, making a modest recovery after a sharp decline earlier this month.

However, while this uptick in price is certainly noteworthy, it comes after a bearish dip that saw POL fall 7% over the past week. The recent pattern on the chart hints at a possible continuation of the previous uptrend, yet analysts are quick to note that the price could face resistance. Many investors are still sitting on losses, and until they reach profitability, their willingness to hold or sell may influence the token’s price action.

Low Volume, High Uncertainty: A Risk for Buyers?

The bullish flag suggests that POL could indeed continue moving upward, but the key to its success lies in increasing buying volume. At present, the buying activity appears sluggish, with minimal fluctuation in both buying and selling volumes, as reflected in the volume histogram bars. The Money Flow Index (MFI) has recently risen to 62, hinting at a modest increase in buying pressure.

Moreover, the Moving Average Convergence Divergence (MACD) indicator has flipped green, signaling that the bulls may be regaining control. The MACD histogram bars are now showing positive momentum, and the MACD line is trending upwards. If this line crosses above the signal line, it could confirm short-term bullish sentiment. But without a significant surge in buying activity, sustaining an uptrend will remain a challenge.

Key Support and Resistance Levels to Monitor

To understand the potential price movement, it’s crucial to watch the key levels on the chart. According to data from IntoTheBlock’s In/Out of the Money Around Price (IOMAP) metric, there are significant price zones to be aware of. Nearly 10,000 addresses bought POL between $0.65 and $0.67, which could now serve as a strong support level. If the price falls below this range, it might trigger a downturn, leading to further losses.

On the flip side, there’s another important price zone between $0.67 and $0.69, where more than 10,000 addresses collectively purchased over 31 million POL tokens. This group of holders could create strong selling pressure if the price reaches this range and they begin to realize profits, forming a potential resistance zone.

Declining dApp Activity: What’s Behind the Drop?

Despite the potential for price gains, Polygon is facing headwinds in other areas. One key metric to consider is the drop in activity on Polygon’s decentralized applications (dApps). According to DappRadar, Polygon’s seven-day dApp volumes have decreased by over 8%, with the current volume standing at $2.41 billion. Additionally, the number of Unique Active Wallets (UAWs) has fallen by 10%, suggesting that user engagement on the platform may be slowing.

However, it’s not all bad news for the Polygon network. In the realm of decentralized finance (DeFi), Polygon is showing resilience. The Total Value Locked (TVL) in DeFi protocols on Polygon has surged to $1.195 billion, reaching its highest level in over a month. This increase in TVL points to growing interest in Polygon’s DeFi ecosystem, which could provide some support for the POL token if the trend continues.

Sentiment Shifts: A Rising Tide of Short-Selling

While Polygon has managed to retain some bullish indicators, the overall sentiment among traders remains cautious. The long/short ratio of Polygon’s token has fluctuated significantly over the past few weeks. On December 9th, the ratio hit a monthly low of 0.79, reflecting a rise in short-selling activity. However, by December 13th, this ratio had improved to 0.90, signaling a shift in sentiment toward a more neutral or slightly optimistic view.

Even though this shift represents a more favorable outlook for buyers, there are still more short positions than long ones, indicating that 52% of traders are betting on the price declining further. This bearish sentiment, combined with the declining dApp activity, suggests that POL might face an uphill battle before breaking out decisively.

Should Buyers Be Cautious?

In conclusion, while the formation of a bull flag on Polygon’s price chart suggests the potential for an uptrend, traders should remain cautious. The current low trading volumes, the possibility of profit-taking from key price zones, and the decreasing dApp activity all point to potential risks for buyers. Furthermore, the shift in sentiment from short-selling to slightly bullish may indicate a market that is still uncertain about Polygon’s ability to maintain its recent gains.

For investors looking to buy into Polygon, it’s important to monitor the increasing buying volumes and watch for confirmation from the MACD and other indicators. Additionally, the strength of Polygon’s DeFi ecosystem could provide some much-needed support for the token’s price in the long run.

As always, it’s crucial to approach this investment with caution, keeping an eye on both market sentiment and key price levels. The next few days will be crucial in determining whether this bull flag will lead to sustained growth or a false breakout.