ETH derivatives metrics and technical analysis point to further downside in Ethereum price.
Despite recovering from a 45-day low on April 30, Ether (ETH) price is still stuck in a descending channel, and the subsequent 9% surge over the past four days was just enough to attract the altcoin to test the $2,870 pattern resistance.
Ether/USD price on FTX. Source: TradingView
Federal Reserve monetary policy continues to have a major impact on crypto prices, and this week’s volatility is most likely tied to FOMC comments. On May 4, the US Federal Reserve increased its federal funds rate reference rate by half a 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 wealth base from June.
Chairman Jeremy Powell said the Federal Reserve is committed to restoring price stability, even if it means hurting the economy through lower business investment and household spending. Powell also dismissed the significance of the decline in gross domestic product in the first three months of 2022.
Despite Ether’s price correcting 14% over the course of a month, the network’s value locked in smart contracts (TVL) rose 7% in 30 days to 25.2 million Ether, according to data from DefiLlama. For this reason, it is worth examining whether the price drop below $3,000 affected derivatives traders sentiment.
ETH futures traders are still bearish
To understand if the market is bearish, traders need to analyze the premium of ether futures contracts, also known as the base rate. Unlike a perpetual contract, these fixed calendar futures contracts do not have a funding rate, so their price is very different from regular spot exchanges.
One can gauge market sentiment by measuring the cost gap between futures and the regular spot market.
Ether 3 Month Futures Premium. Source: Laevitas.ch
To offset trader deposits pending trade settlement, futures should trade at an annualized premium of 5% to 12% in healthy markets. However, as illustrated above, Ether’s annual premium has been below such a threshold since April 5th.
Despite a slight improvement over the past 24 hours, the current base rate of 3.5% is usually viewed as bearish as it signals a lack of demand for leveraged buyers.
Related: The Fed hikes interest rates by 50 basis points to fight inflation
Sentiment on the options markets deteriorated
To rule out externalities specific to the futures instrument, traders should also analyze the options markets. For example, the 25% delta skew compares similar call (buy) and put (sell) options.
This metric turns positive when fear prevails because the protective premium of put options is higher than that of similar-risk call options. The opposite is true when greed prevails, causing the 25% Delta Skew indicator to turn negative.
Ether 30-day options 25% delta skew. Source: Laevitas.ch
An indicator area of 25% skew between negative 8% and positive 8% is usually considered a neutral area. However, the metric has been above such a threshold since April 16 and currently stands at 14%.
With options traders paying higher premiums for downside protection, it’s safe to assume that sentiment has deteriorated over the past 30 days. Currently, there is a growing sense of bearish sentiment in the market.
Of course, none of this data can predict whether Ether will continue to respect the descending channel, which currently holds resistance at $2,950. However, given the current derivatives data, there is reason to believe that an eventual surge above $3,000 is likely to be short-lived.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading movement involves risk. You should do your own research when making a decision.