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Surge or Purge? Why Merge Can’t Save Ethereum Prices From ‘September’

Ethereum’s native token, Ether (ETH), is immune to downside risks in September after rallying about 90% from June’s low of around $880.

Much of the token’s rise is due to a merge, a technical upgrade that will make Ethereum a Proof-of-Stake (PoS) protocol, scheduled for September 15th.

However, despite registering an impressive June-September rise, Ether is still trading about 70% below its November 2021 record high of around $4,950.

ETH/USD weekly price chart.Source: Trading View

Below are three indicators of a bear market for Ethereum, and why further declines are likely.

sell ethereum merge news

Ethereum options traders expect the price of ether to reach $2,200 from the current $1,540 before the merger, according to Deribit data compiled by Glassnode. Some see the price reaching his $5,000 mark, but enthusiasm seems to have plateaued after the PoS switch.

There appears to be demand for downside protection among traders after the merger, as indicated by the so-called “Options Implied Volatility Smile” indicator (OIVS).

OIVS shows an option’s implied volatility at different strike prices at specific expiration dates. Therefore, non-equity contracts typically exhibit higher implied volatility and vice versa.

For example, in Ethereum’s Sept. 30 option expiry chart below, the steepness and shape of the smile helps traders assess the relative value of an option and determine what tail risk the market is pricing in. help you to

Ethereum OIVS for contracts expiring on September 30, 2022. Source: Glassnode

Thus, indicating strong buy-side demand for ETH call options expiring in September, indicated by the rising slope of the volatility smile, indicating that traders are willing to pay a premium for long-term exposures. increase.

Quoting the OIVS chart below, a Glassnode analyst notes that “after the merger, the left tail priced in significantly higher implied volatility, with traders paying a premium to post-merger ‘sell the news’ put option protection. It shows that you are paying,” he wrote. Call and put positions at different strike rates.

Ethereum OIVS for contracts expiring on October 28, 2022. Source: Glassnode

In other words, ETH traders are hedging their bets in case a news sell event occurs.

hawkish federal reserve

Further downside factors for Ethereum mainly come from its exposure to macroeconomic events such as quantitative tightening by the Federal Reserve.

Last week, Federal Reserve Chairman Jerome Powell reiterated the central bank’s commitment to keeping inflation under control, saying, “We have to keep doing it 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 the next policy meeting in September.

Interest rate hikes have been bad news for the Ethereum/USD pair recently, with a growing positive correlation between the broader crypto sector and the traditional risk-on index against the prospect of lower cash liquidity. For example, the daily correlation coefficient between ETH and Nasdaq as of September 3 was 0.85.

Daily correlation coefficient between ETH/USD and Nasdaq.Source: Trading View

So, especially if the Fed raises by 0.75%, Ether will likely fall alongside riskier assets.

That giant ether “bear flag”

From a technical standpoint, Ether is drawing what looks like a bearish flag on the weekly chart.

A bear flag appears when the price rises inside a parallel channel that rises after a strong downtrend. They resolve after the price has fallen out of the channel and, as a rule of technical analysis, falls by the length of the previous downtrend (the flagpole).

Ether has tested the bear flag’s lower trendline as support this week. From here, the Ethereum token could bounce back and retest the flag’s upper trendline (~$2,500) as resistance or break below the lower trendline to continue the general bearish trend.

Related: The Merge’s ETH Price Outlook: Bullish or Bearish? | | TheChartGuys Interview

Given the above factors, the ETH/USD pair is at risk of entering the bear flag breakdown stage in September as shown in the chart below.

ETH/USD weekly price chart featuring a ‘bearish flag’ setting.Source: Trading View

Therefore, ETH’s bear profit target will be close to $540 in 2022, down about 65% from today’s price.

The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. All investment and trading movements involve risk. You should do your own research when making a decision.