Increase or cleanse? Why the merger may not provide the price of Ethereum from ‘Septembear’

Ethereum’s native token, ETH (ETH), is not immune to downside risks in September after rallying nearly 90% from its low of around $880 in June.

Much of the token’s upside has been attributed to the consolidation, a technology upgrade that will make Ethereum a Proof of Stake (PoS) protocol, scheduled for September 15.

But despite making impressive gains between June and September, Ether is still trading nearly 70% below the record high of around $4,950 as of November 2021. Therefore, the possibility of a downward trend remains on the table.

ETH/USD weekly price chart. Source: TradingView

Here are three bear market indicators for Ethereum that explain why further declines are likely.

Sell ​​Ethereum Merge News

Ethereum options traders expect Ether to reach $2,200 from the current level of $1,540 before the merger, according to Deribit data compiled by Glassnode. Some see the price as high as $5,000, but the enthusiasm seems to be steadfast after the PoS switch.

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

OIVS shows options implied volatility options with different strikes for the specified expiration date. Therefore, out-of-equity contracts usually show higher implied volatility, and vice versa.

For example, in the Ethereum September 30 options expiration chart below, the slope and shape of the smile help traders assess the relative cost of options and gauge the type of tail risk that the market is setting.

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

Thus, it shows a strong buy-side demand for ETH call options expiring in September, signaling the upward slope of the volatility smile, showing traders are willing to pay a premium for long-term exposure.

“After the merger, the left tail is priced at significantly higher implied volatility, indicating that traders are paying a premium for the protection of the post-merger put option,” Glassnode analysts wrote, citing the OIVS chart below. Call and subtract open interest at different strike rates.

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

In other words, ETH traders hedge their bets in the event of a news selling event.

The hawkish Federal Reserve

More negative signals from Ethereum are coming from its exposure to macroeconomic events, primarily quantitative tightening by the Federal Reserve.

Last week, Federal Reserve Chairman Jerome Powell reiterated the central bank’s commitment to curbing inflation, noting that they “have to stick to that until the job is done.” In other words, Powell and his partners are likely to raise rates by 0.5%-0.75% at the next policy meeting in September.

The recent interest rate hike has been bad news for the ETH/USD pair, given the increasing positive correlation between the broader crypto sector and traditional risk-versus-risky indicators. For example, the daily correlation coefficient between ETH and Nasdaq as of September 3rd was 0.85.

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

Therefore, the probability of Ether falling along with riskier assets is high, especially if the Fed rises by 0.75%.

That giant that carries the flag of ether

From a technical perspective, Ether is plotting what looks like a bear flag on the weekly chart.

Bear flags appear when the price consolidates higher within an ascending parallel channel after a strong bearish move. It is resolved after the price exits the channel to the lower side and, as a rule in technical analysis, decreases by the length of the previous downtrend (flag).

Ether tested the lower bear flag trendline as support this week. From here, the Ethereum coin could either bounce to retest the upper trendline of the flag (~$2,500) as resistance or break below the lower trendline to continue the dominant downtrend.

Related Topics: ETH Consolidation Price Predictions: Bullish or Bearish? | TheChartGuys interview

Given the factors discussed above, the ETH/USD pair risks entering a bear pennant breakdown phase in September, as shown in the chart below.

ETH/USD weekly price chart featuring a “bear flag” setup. Source: TradingView

Therefore, ETH’s profit target is approaching $540 in 2022, about 65% lower than today’s price.

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