A $250 surprise rally took place between Oct. 25 and Oct. 26, pushing the price of Ether (ETH) from $1,345 to $1,595. The movement caused $570 million in liquidations in Ether’s bearish bets at derivatives exchanges, which was the largest event in more than 12 months. Ether’s price also rallied above the $1,600 level, which was the highest price seen since Sept. 15.
Let’s explore whether this 27% rally over the past 10 days reflects any signs of a trend change.
Ether/USD 4-hour price index. Source: TradingView
It is worth highlighting that another 10.3% rally toward $1,650 happened three days later on Oct. 29, and this triggered another $270 million of short seller liquidations on ETH futures contracts. In total, $840 million worth of leveraged shorts was liquidated in three days, representing over 9% of the total ETH futures open interest.
On Oct. 21, the market became optimistic after San Francisco Federal Reserve President Mary Daly mentioned intentions to step down the pace of interest rate hikes. However, the United States central bank’s previous tightening movement has led the S&P 500 stock market index to a 19% contraction in 2022.
Despite the 5.5% stock market rally between Oct. 20 and Oct. 31, analysts at ING noted on Oct. 28 that “we do indeed expect the Fed to open the door to a slower pace through formal forward guidance, but it may not necessarily go through it.” Furthermore, the ING report added, “It could be that we get a final 50bp in February that would then mark the top. This would 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 have been supporting the recent price rally.
Futures traders kept a bearish stance despite the $1,600 rally
Retail traders usually avoid quarterly futures due to their price difference from spot markets. Still, they are professional traders’ preferred instruments because they prevent the fluctuation of funding rates that often occurs in a perpetual futures contract.
Ether 3-month futures annualized premium. Source: Laevitas
The indicator should trade at a 4% to 8% annualized premium in healthy markets to cover costs and associated risks. Hence, the above chart clearly shows a prevalence of bearish bets on ETH futures, as its premium stood in the negative area in October. Such a situation is unusual and typical of bearish markets, reflecting professional traders’ unwillingness to add leveraged long (bull) positions.
Traders should also analyze Ether’s options markets to exclude externalities specific to the futures instrument.
ETH options traders moved to a neutral positioning
The 25% delta skew is a telling sign of when market makers and arbitrage desks are overcharging for upside or downside protection.
Ether 60-day options 25% delta skew: Source: Laevitas
In bear markets, options investors give higher odds for a price dump, causing the skew indicator to rise above 10%. On the other hand, bullish markets tend to drive the skew indicator below -10%, meaning the bearish put options are discounted.
The 60-day delta skew had been above the 10% threshold until Oct. 25, and signaling options traders were less inclined to offer downside protection. However, a significant change happened over the following days as whales and arbitrage desks started to price a balanced risk for downward and upward price swings.
Liquidations show a surprise move, but minimal confidence from buyers
These two derivatives metrics suggest that Ether’s 27% price rally from Oct. 21 to Oct. 31 was not expected, which explains the huge impact on liquidations. In comparison, a 25% Ether rally from Aug. 4 to Aug. 14 caused $480 million worth of leveraged short (sellers) liquidations, roughly 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 have stood on the sidelines during such an impressive rally.
Until there is confirmation of the $1,500 support level’s strength and per traders’ increased appetite for leverage longs, investors should not rush to the conclusion that the Ether rally is sustainable.
The views and opinions expressed here 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 conduct your own research when making a decision.