Ethereum’s native token, Ether (ETH), is not immune to downside risk in September, having rallied about 90% from its low point of around $880 in September.
Much of the token’s rise has been attributed to Merge, a technical upgrade that would make Ethereum a proof-of-concept (PoS) protocol, slated for September 15.
But despite significant gains between June and September, Ether is still trading almost 70% below its peak of around $4,950 from November 2021. So, it cannot be ruled out that it is heading towards reduced.
Here are three bearish indicators from the Ethereum market that show why further declines are likely.
Sell Ethereum Merge News
Ethereum options traders expect the price of Ether to reach $2,200 from the current level of $1,540 ahead of the Merger, according to Deribit data compiled by Glassnode. Some even see the price reaching $5,000, but enthusiasm seems to be flat after the PoS change.
There appears to be a demand for downside protection among traders following the Merger, as indicated by the so-called Options Inherent Flexibility (OIVS) metric.
The OIVS shows the implied volatility of options with different strikes for the specific expiration date. Thus, non-capital contracts generally exhibit higher implied volatility, and vice versa.
For example, in the chart below of Ethereum options to expire on September 30, the slope and the shape of the smile help traders measure the relative cost of the options and measure the type of tail risks that the market will consider.
Thus, it shows strong buying demand for ETH calls expiring in September, indicated by the upward slope of the volatility smile, indicating that traders are willing to pay a premium for long exposure.
“After the Merger, left tail rates significantly higher implied volatility, indicating that traders are paying a premium for ‘sell the news’ option to put option protection after the Merger,” Glassnode analysts wrote, at refer to the OIVS chart below which also shows the open call interest and put options at different strike rates.
In other words, ETH traders hedge their bets in the event of a “sell the news” event.
The reluctant Federal Reserve
Other signs of Ethereum’s decline come from its exposure to macroeconomic events, primarily the Federal Reserve’s quantitative tightening.
Last week, Fed Chairman Jerome Powell reiterated the central bank’s commitment to controlling inflation, noting that “they have to keep going until the job is done. In other words, Powell and his colleagues are likely to raise interest rates by 0.5% to 0.75% at their next policy meeting in September.
The recent rate hikes have been bad news for the ETH/USD pair, given the growing positive correlation between the broader cryptocurrency sector and traditional risk indices against the prospect of diminishing cash liquidity. For example, the daily correlation coefficient between ETH and Nasdaq on September 3 was 0.85.
Therefore, the possibility of Ether falling alongside risk assets is high, especially if the Fed rises 0.75%.
“flag bearer” of this Aether giant
From a technical point of view, Ether is painting a bearish flag on its weekly chart.
Bearish flags are seen when price consolidates higher inside a parallel rising channel after a strong downward move. They settle after a price break on the downward channel and, as a rule of technical analysis, fall as much as the length of the previous downtrend (flagpole).
Ether tested the lower trendline of the bearish flag as support this week. From there, the Ether signal could either retrace the flag’s upper trendline (~$2,500) as resistance, or break below the lower trendline to continue the downtrend.
Also read: ETH Price Outlook for “The Merge”: Rise or Fall? | Interview with TheChartGuys
Given the factors discussed above, the ETH/USD pair is likely to enter the bearish flag breakout phase in September, as shown in the chart below.
Therefore, ETH’s bear flag profit target comes to be close to $540 in 2022, which would be about a 65% decline from today’s price.
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