A sudden increase of $250 occurred between October 25 and 26, pushing the price of Ether (ETH) from $1,345 to $1,595. The move caused $570 million in liquidations of Ether’s bearish bets on derivatives exchanges, the biggest event in more than 12 months. The price of Ether also rose above the $1,600 level, which was the highest price seen since September 15th.
Let’s explore whether this 27% rise over the past 10 days reflects any signs of a trend reversal.
It is worth noting that another 10.3% rally towards $1,650 occurred three days later on October 29, and this triggered another $270 million in liquidations by short sellers on ETH futures contracts. A total of $840 million worth of short leveraged loans were liquidated in three days, representing over 9% of total open interest on ETH futures.
The market turned bullish on October 21 after San Francisco Federal Reserve Chair Mary Daly mentioned intentions to reduce the pace of interest rate hikes. However, previous US central bank tightening has sent the S&P 500 down 19% in 2022.
Despite the stock market rising 5.5% between October 20 and 31, ING analysts noted on October 28 that “we do expect the Fed to open the door to a slower pace through formal forward guidance, but that may not necessarily go through it.” Furthermore, the ING report added: “It could be that we get a final 50bp in February which would then mark the top. That would leave a terminal rate of 4.75% to 5%.”
Given the conflicting signals from traditional markets, let’s take a look at Ether derivatives data to understand if investors support the recent price rally.
Futures traders remained bearish despite the $1,600 rise
Retailers typically avoid three-month futures because of their price differential from the spot market. Nevertheless, they are the preferred instruments of professional traders because they prevent the fluctuation of funding rates that often occurs in a perpetual futures contract.
The index should trade at a 4% to 8% annual premium in healthy markets to cover costs and associated risks. Therefore, the chart above clearly shows the prevalence of bearish bets on ETH futures, as its premium was in negative territory in October. Such a situation is unusual and typical of a bear market, reflecting the reluctance of professional traders to add long (bullish) positions with leverage.
Traders should also analyze Ether’s options markets to rule out instrument-specific externalities.
ETH options traders have moved to neutral positioning
A delta skew of 25% is a telltale sign when market makers and arbitrage tables are charging too high prices for upside or downside protection.
In bear markets, option investors place higher odds on the price falling, causing the skewness indicator to rise above 10%. On the other hand, bull markets tend to drop the skewness indicator below -10%, which means bearish put options are discarded.
The 60-day delta swing was above the 10% threshold by October 25, and signaling options traders were less inclined to offer downside protection. However, a significant change occurred in the following days as whales and arbitrage tables began to set risk-balanced prices for both downward and upward price changes.
The liquidations show a surprising move, but minimal customer confidence
These two derivative metrics suggest that the 27% increase in the price of Ether from October 21 to October 31 was not expected, which explains the huge impact on liquidations. In comparison, Ether’s 25% rise from August 4th to August 14th caused $480 million worth of short leveraged liquidations (sellers), down roughly 40%.
Currently, the prevailing sentiment is neutral towards the ETH options and futures markets. So traders are likely to tread cautiously, especially when whales and arbitrage tables have stood by during such an impressive rally.
Until there is confirmation of the strength of the $1,500 support level and the increased appetite of professional traders for long leverage, investors should not rush to the conclusion that Ether’s rally is sustainable.
The views and opinions expressed herein are solely those of the authors and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should do your own research when making a decision.