Ethereum rallies to $1,350, but derivatives metrics remain neutral to bearish

Ether (ETH) rallied 6.3% to $1,350 on Dec. 13, mimicking a similar failed attempt that took place on Nov. 10. Despite reaching the highest level in 33 days, the gains were not enough to instill confidence in traders according to two key derivatives metrics.

Bulls’ frustrations can partially be explained by Binance exchange facing a near-record $1.1 billion in withdrawals over a 24-hour period. The unusual behavior comes as Binance attempts to put out multiple disputes about its proof of reserves and overall solvency on crypto Twitter. According to Binance CEO, Changpeng Zhao, the social media posts amount to nothing more than FUD.

However, Binance’s USD Coin (USDC) reserves were emptied after alleged troubles with commercial banking hours.

The negative newsflow continued on Dec. 13, as the United States Securities and Exchange Commission (SEC) filed charges against Sam Bankman-Fried, the former CEO of now-bankrupt FTX crypto exchange. The fresh charges come just a day after his arrest by Bahamian authorities at the request of the U.S. government.

On Dec. 13, the United States Commodity Futures Trading Commission (CFTC) also filed a lawsuit against Sam Bankman-Fried, FTX and Alameda Research, claiming violations of the Commodity Exchange Act and it demanded a jury trial.

Traders are relieved that Ether is trading above the $1,300 level, but the rebound has been mostly driven by the Consumer Price Index (CPI) print for November at 7.1% year-on-year, which was a tad bit softer than expected. More importantly, the U.S. Federal Reserve (FED) is expected to decide on the interest rate hike on Dec. 14 and analysts expect the size of rate hikes to decline now that inflation appears to have peaked.

Consequently, investors believe that Ether could retrace its recent gains if comments Federal Reserve Chair Jerome Powell take a hawkish angle, a point highlighted by trader CryptoAceBTC:

Liquidity is low in market
And retracing quickly is only way to bring in buyers and sellers

I think Fed meet will be Hawkish and price will retrace this CPI pump

Bitcoin $18k $18.5k resistance
ETH $1350-$1400
Will wait for Fed meet to load shorts

— Cryptoce (@CryptoAceBTC) December 13, 2022

Let’s look at Ether derivatives data to understand if the surprise pump positively impacted investors’ sentiment.

The rally to $1,300 had a limited impact on confidence

Retail traders usually avoid quarterly futures due to their price difference from spot markets. Meanwhile, professional traders prefer these instruments because they prevent the fluctuation of funding rates in a perpetual futures contract.

The two-month futures annualized premium should trade between +4% to +8% in healthy markets to cover costs and associated risks. When the futures trade at a discount versus regular spot markets, it shows a lack of confidence from leverage buyers which is a bearish indicator.

The chart above shows that derivatives traders remain in “fear mode” because the Ether futures premium is below 0%, indicating the absence of leverage buyers’ demand. Still, such data does not signal traders expect further adverse price action.

For this reason, traders should analyze Ether’s options markets to understand whether investors are pricing higher odds of surprise negative price movements.

Options traders were on the verge of turning neutral

The 25% delta skew is a telling sign when market makers and arbitrage desks are overcharging for upside or downside protection.

In bear markets, options investors give higher odds for a price dump, causing the skew indicator to rise above 10%. On the other hand, bullish markets tend to drive the skew indicator below -10%, meaning the bearish put options are discounted.

The delta skew improved considerably between Dec. 7 and Dec. 11, declining from a fearful 16% to a neutral balanced-risk options pricing at 9.5%. The movement signaled that options traders were more comfortable with downside risks. However, the situation changed on Dec. 13 after Ether failed to break the $1,350 resistance.

As the 60-day delta skew stands at 14%, whales and market makers are reluctant to offer downside protection, which seems odd, considering ETH is trading at the highest level in 32 days. Both options and futures markets point to pro traders fearing that the $1,300 resistance will not hold ahead of the FED meeting.

Currently, the odds favor Ether bears because the FTX exchange bankruptcy increased the possibility of stricter regulation and brought discomfort to cryptocurrency investors.