Ethereum price hits $1.6K as markets expect the FED to ease the pressure

A surprise $250 rally took place between October 25 and October 26, pushing the price of Ether (ETH) from $1,345 to $1,595. The move led to $570 million in liquidations in bearish Ether bets on derivatives exchanges, the biggest move 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 if this 27% rally in the last 10 days shows any signs of a trend change?

4 hour ether/USD price index. Source: TradingView

It is worth noting that another 10.3% rally towards $1,650 occurred three days later on October 29, and this prompted another $270 million of short-selling liquidations of ETH futures contracts. In total, $840 million of leveraged shorts were liquidated in three days, representing 9% of the total open interest in ETH futures.

On October 21, the market became optimistic when San Francisco Federal Reserve (FED) President Mary Daly stated her intention to slow the pace of interest rate hikes. However, due to a previous tightening move by the US Federal Reserve, the S&P 500 stock market index contracted by 19% in 2022.

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Despite the stock market rally 5.5% between October. go through.” In addition, the ING report said, “we may get a final 50bp in February that would mark the top then. This would leave a final rate of 4.75% to 5%.”

Given the conflicting signals from traditional markets, let’s look at Ether derivatives data to understand if investors are supporting the recent price rally.

Futures traders maintained a bearish stance despite the $1,600 rally

Retail traders tend to avoid quarterly futures because of their price difference from spot markets. Still, they are the preferred instruments of professional traders because they prevent the volatility of funding rates that often occurs in a perpetual futures contract.

Ether annualized 3 month futures premiums. Source: Laevtas.ch

The indicator should trade at a 4% to 8% annual premium in healthy markets to cover associated costs and risks. Thus, the chart above clearly shows the prevalence of bearish bets on ETH futures, as its premium stood in the negative zone in October. Such a situation is unusual and typical in bearish markets, which shows that professional traders are not willing to add long (bull) leveraged positions.

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Traders should also analyze Ether options markets to rule out externalities specific to the futures instrument.

ETH options traders moved to a neutral position

A 25% delta skew is a significant indication that market makers and arbitrage desks are charging too much for upside or downside protection.

Options 60-day ether 25% delta skew: Source: Laevitas.ch

In bear markets, option investors give higher options to a price dump, causing the skewness indicator to rise above 10%. On the other hand, bullish markets tend to drive the skew indicator below negative 10%, which means that the bearish options are canceled.

The 60-day delta skew was above the 10% threshold until October 25, and signaling options traders were less willing to offer downside protection. However, a significant change occurred in the following days when whales and arbitrage desks began to price equalized risk for downward and upward price swings.

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Liquidations show a surprising move, but minimal confidence from buyers

Both of these derivative metrics suggest that Ether’s 27% price rally from October 21st to October 31st was definitely not expected, which explains the huge impact on liquidations. In comparison, Ether’s 25% rally from August 4th to August 14th caused $480 million worth of leveraged short liquidations (sellers), about 40% lower.

Currently, the prevailing sentiment is neutral according to ETH options and futures markets. Therefore, traders are likely to tread carefully, especially when whales and arbitrage desks stood on the sidelines during such a spectacular rally.

Until the strength of the $1,500 support levels is confirmed and traders have increased appetite for leveraged lengths, investors should not rush to the conclusion that Ether’s rally is sustainable.