Surge or purge? Why the Merge may not save Ethereum price from ‘Septembear’

Ethereum

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

Much of the token’s upside move is attributed to the Merge, a technical upgrade that would make Ethereum a proof-of-stake (PoS) protocol, slated for Sep. 15.

But despite logging impressive gains between June and September, Ether still trades almost 70% below its record high of around $4,950 from November 2021. Therefore, its possibility of heading lower remains on the cards.

ETH/USD weekly price chart. Source: TradingView

Here are three Ethereum bearish market indicators that show why more downside is likely. 

Sell the Ethereum Merge news

Ethereum options traders anticipate Ether’s price to reach $2,200 from its current $1,540 level ahead of the Merge, according to Deribit data compiled by Glassnode. Some even see the price hitting $5,000, but enthusiasm looks flat post the PoS switch.

There appears to be demand for downside protection among traders after the Merge, indicated by a so-called “options implied volatility smile” metric (OIVS).

OIVS illustrates the options’ implied volatilities with different strikes for the specific expiration date. So, contracts out of capital typically show higher implied volatility, and vice versa.

For instance, in the Ethereum’s Sept. 30 options expiry chart below, the smile’s steepness and shape help traders assess the relative expensiveness of options and gauge what kind of tail risks the market is pricing in.

Ethereum OIVS for the contract expiring on Sept. 30, 2022. Source: Glassnode

Thus, it shows a large buy-side demand for ETH call options expiring in September, indicated by the volatility smile’s upward slope, showing traders are willing to pay a premium for a long exposure.

“Post Merge, the left tail is pricing in significantly higher implied volatility, indicating traders are paying a premium for ‘sell-the-news’ put-option protection post-Merge,” Glassnode analysts wrote, citing the OIVS chart below that also features Call and Put open interests at different strike rates.

Ethereum OIVS for the contract expiring on Oct. 28, 2022. Source: Glassnode

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

Hawkish Federal Reserve

More downside cues from Ethereum come from its exposure to macroeconomic events, mainly quantitative tightening by the Federal Reserve.

Last week, Fed Chairman Jerome Powell reiterated the central bank’s commitment to curbing inflation, noting they “must keep at it until the job is done.” In other words, Powell and his associates would likely raise interest rates by 0.5%-0.75% in their next policy meeting in September.

Rate hikes have recently been bad news for the ETH/USD pair, given the growing positive correlation between a broader crypto sector and traditional risk-on indices against the prospects of declining cash liquidity. For instance, the daily correlation coefficient between ETH and Nasdaq as of Sep. 3 was 0.85.

ETH/USD and Nasdaq daily correlation coefficient. Source: TradingView

Therefore, the possibility of Ether declining alongside riskier assets is high, particularly if the Fed hikes by 0.75%.

That giant Ether “bear flag”

From a technical perspective, Ether is painting what appears like a bear flag on its weekly chart.

Bear flags appear when the price consolidates higher inside an ascending parallel channel after a strong move downward. They resolve after the price breaks out of the channel to the downside and, as a rule of technical analysis, falls by as much as the previous downtrend’s length (flagpole).

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

Related: ETH price outlook for The Merge: Bullish or bearish? | TheChartGuys interview

Given the factors discussed above, the ETH/USD pair risks entering the bear flag breakdown stage in September, as illustrated in the chart below.

ETH/USD weekly price chart featuring ‘bear flag’ setup. Source: TradingView

Therefore, ETH’s bear flag profit target comes to be near $540 in 2022, down approximately 65% from today’s price.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

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