Ethereum price action and derivatives data confirms that bears are currently in control

The price of Ether (ETH) fell 6% between March 2 and March 3, followed by a close trade near USD 1,560. Still, analyzing a broader time frame doesn’t yield a clear trend, as the chart may point to a bearish channel or a slightly longer seven-week bullish pattern.

Ether’s recent lack of volatility can be partially explained by the upcoming hard fork in Shanghai, an implementation aimed at enabling withdrawals of ETH strikes. Those participants each had to lock 32 ETH onto the Beacon Chain to support the network consensus protocol.

After a series of delays typical of changes in the production environment, the Shanghai Capella upgrade — also known as Shapella — is expected to start in early April, according to Ethereum core developer and project coordinator Tim Beiko. The Goerli testnet upgrade on March 14 will be the final rehearsal for the Shanghai hard fork before rolling out to the mainnet.

Recession risks are increasing, in favor of ETH bears

On the macroeconomic front, US Federal Reserve Chairman Jerome Powell testified before the Senate Banking Committee on March 7. Powell stated that interest rates are likely to rise higher than expected after “the latest economic data comes out stronger than expected”.

There are indications that the Fed is lagging the inflation curve, increasing the likelihood of harder-than-expected rate hikes and asset sales by the monetary authority. For example, a Citigroup inflation surprise index rose for the first time in more than 12 months in February.

For risky assets, including cryptocurrencies, a more substantial move from the Fed typically implies a bearish scenario as investors seek refuge in fixed income and the US dollar. This shift becomes more pronounced in a recessionary environment, which many speculate is imminent or already here.

The regulatory environment for cryptocurrency companies is adding additional pressure, especially after US press secretary Karine Jean-Pierre said the White House noted that crypto-friendly bank Silvergate has “experienced significant difficulties” in recent months.

Let’s take a look at Ether derivatives data to understand whether the $1,560 level is likely to become a support or resistance.

ETH derivatives show reduced demand for longs

The annualized three-month futures premium should trade between 5% and 10% in healthy markets to cover the costs and associated risks. However, when the contract is trading at a discount (backwardation) to traditional spot markets, it shows a lack of confidence from traders and is considered a bearish indicator.

The chart above shows that derivatives traders became somewhat uncomfortable as the Ether futures premium (on average) rose to 3.1% on March 7, down from 4.9% a week earlier. More importantly, the indicator moved further away from the 5% neutral-to-bullish mark.

Still, declining demand for leverage longs (bulls) doesn’t necessarily translate into the expectation of adverse price action. Consequently, traders should analyze Ether options markets to understand how whales and market makers assess the probabilities of future price movements.

The 25% delta skew is a telltale sign when market makers and arbitrage desks are charging too much for upside or downside protection.

In bear markets, option investors give higher chances of a price fall, pushing the skew indicator above 10%. On the other hand, bullish markets tend to push the skew metric below -10%, which means there is less demand for the bearish put options.

The delta skew broke above the 10% bearish threshold on March 4, signaling stress from professional traders. A brief improvement occurred on March 7, though the measure continues to flirt with bearish expectations as option traders charge higher fees for protective put options.

Investors who base their decisions on fundamentals will likely expect the first few weeks after the Shanghai upgrade to gauge the potential impact of ETH unlocking. Ultimately, options and futures markets indicate that professional traders are less likely to add long positions, increasing the likelihood of $1,560 becoming a resistance level in the coming weeks.