On October 25-26, there was a surprise $250 rally that propelled the price of Ether (ETH) from $1,345 to $1,595. The move triggered $570 million in Ether bear bet selloffs on derivatives exchanges, the largest event in more than 12 months. Ether price also broke above the $1,600 level, which was the highest price seen since Sept. 15.
Let’s explore if this 27% rally in the last 10 days reflects any signs of trend reversal.
It should be noted that three days later, on Oct. 29, another 10.3% rally to $1,650 occurred, triggering another $270 million of short seller liquidations in ETH futures contracts. In total, $840 million worth of short leveraged contracts were settled in three days, representing more than 9% of the total open interest in ETH futures.
On October 21, the market was bullish after San Francisco Fed President Mary Daly mentioned intentions to slow the pace of interest rate hikes. Nevertheless, The US central bank’s earlier tightening move has pushed the S&P 500 stock index to a 19% contraction in 2022.
Despite the 5.5% stock rally between October 20 and 31, ING analysts noted on October 28: “in fact, we expect the Fed to open the door at a slower pace through formal guidance towards forward, but I may not necessarily do so. In addition, the ING report added that “it could be that we have a last 50 basis points in February that would mark the top. This would leave a terminal rate of 4.75% to 5%”.
Given the mixed signals from traditional markets, let’s look at Ether derivatives data to understand if investors have been supporting the recent price rally.
Futures traders maintained a bearish stance despite the $1,600 rally
Quarterly futures are often avoided by retail traders due to their price difference from spot markets. However, they are the instruments of choice for professional traders because they avoid the fluctuation in funding rates that often occurs with a perpetual futures contract.
The indicator should trade at an annualized premium of between 4% and 8% in healthy markets to cover the associated costs and risks. Therefore, the chart above clearly shows a predominance of bearish bets on ETH futures as its premium moved into the negative zone in October. This situation is unusual and typical of bear markets, and reflects the unwillingness of professional traders to add long leveraged (bullish) positions.
Traders should also analyze the Ether options markets to exclude externalities inherent to the futures instrument.
ETH Options Traders Switched to Neutral Positioning
The 25% delta bias is a telltale sign of when market makers and arbitrage desks are overcharging for bullish or bearish protection.
In bear markets, option investors place higher odds on a price decline, causing the bias indicator to rise above 10%. Secondly, bull markets tend to push the bias indicator below -10%, meaning bearish put options are priced in.
The 60-day delta bias had been above the 10% threshold until Oct. 25, signaling that options traders were less inclined to offer downside protection. However, in the days that followed, a significant shift occurred, as brokers and arbitrage desks began to assess a balanced risk for both downside and upside price swings.
Selloffs show surprise move, but minimal buyer confidence
These two derivatives metrics suggest that the 27% rally in the price of Ether between October 21 and 31 was not expected, which explains the huge impact on liquidations. By comparison, a 25% rally in Ether from August 4-14 triggered $480 million worth of leveraged short (seller) liquidations, roughly 40% less.
Currently, the prevailing sentiment is neutral based on the ETH futures and options markets. Therefore, Traders are likely to err on the side of caution, especially as whales and arbitrage desks have stayed on the sidelines during such an impressive rally.
Until the strength of the $1,500 support level is confirmed and professional traders’ appetite for long contracts with leverage increases, investors should not rush to conclude that Ether’s rally is sustainable.
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