A $250 surprise rally occurred 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 of Ether’s bearish bets on derivative exchanges, which was the largest event in more than 12 months. The price of Ether also rallied above the $1,600 level, which is the highest price seen since Sept.
Let’s check if this 27% rally in the last 10 days shows any signs of trend reversal.
It is worth highlighting that another 10.3% rally towards $1,650 occurred three days later on October 29, and this triggered another $270 million short seller liquidations of ETH futures contracts. In total, $840 million worth of leveraged shorts were liquidated in three days, representing 9% of total ETH futures open interest.
On October 21, the market became optimistic after San Francisco Federal Reserve President Mary Daly spoke of intentions to lower the pace of interest rate increases. However, the previous move by the central bank of the United States led the stock market index of the S&P 500 to a 19% decline in 2022.
Despite the 5.5% rally in the stock market between October 20 and October 31, ING analysts noted on October 28 that “in fact we expect the Fed to open the door to a slower pace through formal guidance forward, but it doesn’t necessarily have to. through it.” Additionally, the ING report added, “We may get a final 50bp in February that will mark the upside. This will leave a terminal rate of 4.75% to 5%.
Considering the conflicting signals from traditional markets, let’s look at Ether’s derivatives data to understand whether investors support the recent price rally.
Futures traders maintained a bearish stance despite the $1,600 rally
Retail traders usually avoid quarterly futures because of their price differences from spot markets. However, they are the preferred instruments of professional traders because they prevent the fluctuations in funding rates that often occur with 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 a spread of bearish bets on ETH futures, as its premium stands in negative territory in October. Such a situation is unusual and common in bearish markets, reflecting the reluctance of professional traders to increase leveraged long (bull) positions.
Traders should also analyze the Ether option markets to exclude externalities specific to the futures instrument.
ETH options traders moved to a neutral position
A 25% delta skew is an indicator of when market makers and arbitrage desks are overcharging for upside or downside protection.
In bear markets, options investors give a higher probability for a price dump, causing the skew indicator to rise above 10%. On the other hand, bullish markets tend to bring the skew indicator below -10%, which means that bearish put options are discounted.
The 60-day delta skew is above the 10% threshold through October 25, and options are signaling traders are less inclined to provide downside protection. However, a significant change occurred in the following days as whales and arbitrage desks began pricing in a balanced risk for both downward and upward price swings.
Liquidations show a surprise move, but little confidence from buyers
These two derivatives metrics suggest that the 27% rally in the price of Ether from October 21 to October 31 was not expected, which explains the large impact of the liquidations. In comparison, a 25% Ether rally from August 4 to August 14 caused $480 million worth of leveraged short (sellers) liquidations, roughly 40% less.
Currently, the prevailing sentiment is neutral according to the ETH options and futures markets. Therefore, traders tend to be very careful, especially when whales and arbitrage desks stand on the sidelines during an impressive rally.
Until there is confirmation of the strength of the support level at $1,500 and increased appetite of traders for leveraged longs, investors should not rush to the conclusion that the rally in Ether is sustainable.
The views and opinions expressed herein are solely those of the author 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.