After weeks of sideways price action, Solana (SOL) has broken free from its range-bound movement, surging to $170, fueling a volatile reaction in the market. This breakout has raised questions about whether this is the start of a larger trend reversal or merely a temporary spike fueled by market volatility.

The Short Squeeze

On May 8, Solana surged to a two-month high of $164, igniting a sharp rise that caught many bearish traders off guard. The Relative Strength Index (RSI) quickly entered the overbought zone, signaling a potential top for the rally. As expected, short-sellers, sensing an impending reversal, piled into leveraged positions, hoping to profit from a price drop. However, instead of the expected downturn, what followed was a classic short squeeze. The rally took many bears by surprise, forcing them to cover their positions as the price surged further.

Solana’s clean reclaim of the $170 level was not a fluke but rather the result of solid structural demand and technical alignment. Bulls showed conviction, taking control of a key psychological resistance level and flipping it into support. With strong volume, the rally triggered a cascade of liquidations, wiping out nearly $20 million in short positions. The intense action was not limited to small players. On-chain data revealed an aggressive short position where a wallet had placed a $1.21 million bet against Solana, using 20x leverage. The position risked a forced liquidation if Solana’s price reached $172.96, signaling another potential short squeeze if the momentum continues to the upside.

Is the Rally Sustainable?

As of the latest update, Solana is trading at $171.87, teetering on the edge of a potential liquidity trap for bears. The price is hovering near a critical juncture, and the rally’s sustainability depends on the bulls maintaining conviction. If the FOMO (fear of missing out) sentiment continues, Solana could break even higher. However, if the enthusiasm fades, the momentum could quickly reverse, leading to a sharp pullback.

Currently, signs of weakness are beginning to emerge. Solana’s active address count has dropped from 6.10 million to 5.40 million, reflecting an 11.46% decline in just one day. This decline in network activity could signal waning interest or investor caution. Furthermore, the MVRV (Market Value to Realized Value) ratio is above 1, suggesting that Solana is trading at a premium compared to its realized cost basis. In other words, the market could be flirting with overvaluation, creating conditions ripe for a potential profit-taking cycle, which could put downward pressure on the price.

The Risk of a Reversal

Although the rally appears bullish for now, Solana is in a high-risk zone. The market sentiment is largely optimistic, with a lull in the wider market’s fear, uncertainty, and doubt (FUD). However, the lack of sustained demand could easily tip the scales in favor of the bears, especially if the on-chain indicators continue to show signs of weakness.

Short-sellers are waiting for the right moment to strike, armed with the knowledge that Solana’s market value may be overinflated. If structural demand begins to weaken further, they could capitalize on any subsequent price drops, potentially reversing the current trend.

Conclusion

Solana’s recent breakout has caught the market’s attention, and while the bulls currently control the narrative, the volatility of the situation suggests that the price could swing in either direction. The next few days could be decisive in determining whether the current rally is sustainable or if the market will experience a correction. Investors should keep an eye on key indicators, including the active address count, MVRV ratio, and overall market sentiment, as Solana stands at a crossroads. The battle between bears and bulls at the $170 mark will likely set the tone for Solana’s next major price move.