Descending channel pattern and weak futures data continue to constrain Ethereum price

Binance
Descending channel pattern and weak futures data continue to constrain Ethereum price
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Despite rebounding from a 45-day low on April 30, ether (ETH) prices are stuck in a descending channel, and the ensuing 9% gain over the past four days was enough for the altcoin to test the pattern’s resistance at $2,870.

ETH/USD price in FTX. Source: TradingView

Federal Reserve monetary policy continues to have a significant impact on cryptocurrency prices, and this week’s volatility is likely related to FOMC comments. On May 4, the Fed raised its benchmark overnight interest rate by 0.5 percentage point, the largest increase in 22 years. Although it was a widely expected and unanimous decision, the monetary authority said it would reduce its $9 trillion asset base starting in June.

Chairman Jeremy Powell explained that the Fed is determined to restore price stability, even if it means lower business investment and household spending hurts the economy. Powell also dismissed the importance of falling gross domestic product in the first three months of 2022.

While the price of ether corrected by 14% in a month, the network value locked in smart contracts (TVLs) increased by 7% in 30 days to 25.2 million ether, according to DefiLlama. For this reason, it is worth exploring whether a dip below $3,000 would affect the sentiment of derivatives traders.

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ETH futures show traders still bearish

To understand if the market has turned bearish, traders must analyze the premium on ether futures contracts, also known as the base rate. Unlike perpetual contracts, these fixed-calendar futures have no funding rates, so their prices will be very different from regular spot trades.

One can gauge market sentiment by measuring the fee gap between the futures and regular spot markets.

Ether 3-month futures premium. Source: Laevitas.ch

To compensate traders for their deposits before the trade settles, futures should trade at an annualized premium of 5% to 12% in healthy markets. However, as shown above, Ethereum’s annualized premium has been below this threshold since April 5.

Despite a slight improvement over the past 24 hours, the current benchmark rate of 3.5% is generally considered bearish as it indicates insufficient demand for leveraged buyers.

Related: Fed hikes rates by 50 basis points to fight inflation

Options market sentiment deteriorates

To rule out externalities specific to futures instruments, traders should also analyze the options market. For example, a delta skew of 25% compares similar call (buy) and put (sell) options.

When fear prevails, the indicator turns positive, as protective puts have a higher premium than similarly risky calls. When greed prevails, the opposite is true, causing the 25% delta skew indicator to move into negative territory.

Ether 30-day options 25% delta skew. Source: Laevitas.ch

The 25% skew indicator range between minus 8% and plus 8% is generally considered the neutral zone. However, the metric has been above that threshold since April 16 and is currently at 14%.

With options traders paying higher premiums for downside protection, it is safe to conclude that market sentiment has deteriorated over the past 30 days. Currently, the bearish sentiment in the market is getting stronger.

Of course, none of this data predicts whether Ether will continue to respect the descending channel, which currently holds resistance at $2,950. Nonetheless, given current derivatives data, there is reason to believe that an eventual rise above $3,000 may be short-lived.

The views and opinions expressed here are those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading action involves risk. You should do your own research when making a decision.



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