After rallying around 90% from its June bottom of $880, Ethereum’s native token Ether (ETH) is now not immune to downside risks in September.
Ether trades at 70% below its record high of $4,950 in November 2021, despite making impressive gains between June-September. It is possible that it will fall further.
Weekly chart of the ETH/USD exchange rate. Source: TradingView
These are three indicators that indicate Ethereum’s bearish market. They show why there is more downside.
The Ethereum Merge news is now available
According to Deribit data, Glassnode, Ethereum options traders expect Ether to rise to $2,200 from the $1,540 level it is at before the Merge. Many see Ether reaching $5,000. However, enthusiasm is flat after the PoS switch.
After the Merge, traders seem to want downside protection. This is indicated by an “options implied volatility smile” (OIVS) metric.
OIVS shows the implied volatility of options with different strikes depending on the expiration date. Contracts made out of capital usually have higher implied volatility and vice versa.
In the below Ethereum Sept. 30 Options Expiry Chart, traders can see how the smile’s steepness helps them assess the relative price of options and determine what type of tail risk the market is pricing.
Ethereum OIVS to the contract expiring Sept. 30, 2022 Source: Glassnode
It shows a significant buy-side demand to purchase ETH call options that expire in September. This is indicated by the volatility smile’s upward slope. This indicates traders are willing and able to pay a premium for a longer exposure.
Glassnode analysts stated that “Post Merge the left tail is pricing significantly higher implied volatility,” indicating that traders are paying a premium to’sell-the news’ put-option protection. They cited the OIVS chart below, which also includes Call and Put open interest at different strike rates.
Ethereum OIVS to the contract expiring Oct. 28, 2022. Source: Glassnode
This means that ETH traders are hedging themselves in the event of a sellthe-news event.
Hawkish Federal Reserve
Ethereum’s exposure to macroeconomic events (mainly quantitative tightening at the Federal Reserve) has more downside risks.
Jerome Powell, Fed Chairman, reiterated last week the central bank’s commitment in curbing inflation and stated that they would “keep at it until the task is done.” Powell and his associates will likely increase interest rates by 0.5% to 0.75% at their September policy meeting.
The recent rate hikes have been negative news for the ETH/USD pairing, due to the increasing positive correlation between a wider crypto sector and traditional risk-on indices that are against the prospect of decreasing cash liquidity. As an example, the daily correlation coefficient of ETH and Nasdaq was 0.85 as of Sep. 3.
Daily correlation coefficient between ETH/USD (Nadaq) Source: TradingView
The possibility of Ether falling alongside riskier assets is very high, especially if the Fed increases by 0.75%.
The giant Ether “bear banner”
Technically, Ether paints what looks like a bear chart on its weekly charts.
When the price consolidates higher within an ascending parallel channel following a strong downward move, bear flags are present. These occur when the price breaks out from the channel to the downside. Technical analysis rules dictate that the price falls as far as the length of the previous downtrend (flagpole).
This week, Ether used the lower trendline of the bear flag as support. The Ethereum token can either bounce back to test the flag’s higher trendline ($2,500), or it could break below the lower trendline in order to maintain its bearish trend.
Related: The Merge price outlook for ETH: Bullish or Bearish? TheChartGuys interview
The factors mentioned above suggest that the ETH/USD pair could enter the bear flag stage in September. As illustrated in the chart below.
Weekly price chart for ETH/USD with ‘bear flag setup Source: TradingView
Therefore, ETH’s 2022 bear flag profit target is near $540, which is approximately 65% lower than today’s price.
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