Weekly Technical & Sentiment Report - March 30, 2020

Weekly Technical & Sentiment Report - March 23, 2020

Weekly Technical & Sentiment Report - March 15, 2020

Did We See A Low?

What a week! There was a historic surge of fear from the spread of the coronavirus that fits the mold of a bottoming process in sentiment and price-action followed suit in a variety of key financial markets. This historic past week began with several dislocations in a variety of markets as a result of an oil price war between the Russians and the Saudis. This triggered oil prices to plummet nearly 30% out the gate, causing stock markets to gap lower to fresh (yearly) lows and treasury yields to collapse to historical lows.

The buying climax in treasury futures and the huge gap down in oil futures started a series of exhaustions that can often signal a near-term shift in global market trends. As of late the trend in the market has been down and down big!  And often in global sell-offs everything is down together in high correlations, but when certain markets start turn its often a process that can guide markets to recover broadly. This is why stock markets continued to sell-off last week due to coronavirus fears while treasury and energy markets had already begun to recover.

Once Wednesday rolled around the negative news flow from the coronavirus seemed to gaining momentum once a “pandemic” was official, setting the stage of a series of major bans, closures and cancellations. The simultaneous cascading events of the Trump travel ban and the last minute cancellation of the Utah Jazz NBA game not only set in motion of a series cancellations of major US sporting events, but more importantly triggered a panic in stock markets that eventually led to the largest one-day fall in points for the major US stock indices.

The spike in volatility has been one of the strongest in history and in the only other occasion in 2008 that the VIX spiked to levels seen Thursday, it was brief and climaxed rather quickly. Moreover, pandemonium reached a crescendo that the S&P 500 had reached an oversold mark only seen once before, back on Boxing day 2018. Ironically, that sell-off was similar in size (near 30%) and also marked a first since the Great Financial Recession of 2008 that over 90% of stocks in the S&P 500 traded below their 200-day moving average. On Thursday that reading fell well-over 90% only to recover below 90% to close the week.

Using Elliot Wave analysis from a psychological standpoint, if we’ve potentially reached a climax, it doesn’t mean we’ve hit a low in price. Which means that this stock weakness could persist a while longer. If you look at a chart of the Dow, S&P or the Nasdaq, you’ll clearly see a potential 5-wave pattern emerging as well. The first wave down begun in February going into March. Then, usually the largest wave of selling occurs, which has happened from early-March into last Thursday night. The 3^rd wave of a big move tends to be the largest and usually coincides with a climax of emotion, which we saw this week.

The fact is that negative news flow stemming from the coronavirus will continue if recent history is correct as seen in China. It could be weeks until the amount of cases in the states peaks or even reverse, but the drastic measures made by officials to limit crowds should help. What also helps in crises of confidence in times like these is fiscal and monetary stimulation, which we are starting to see. The Fed not only cut rates and restarted QE, but is intervening in money market operations daily. And, this week we should continue to see more of that, including a cut at this week’s FOMC meeting.

So, where does that leave us. I suspect that if the negative news flow slows down in a positive way that volatility will continue to snap back, allowing for markets to continue to stabilize. Unfortunately, markets hate uncertainty and there is a tremendous number of unknowns going forward. Like, how long will the global economy will suffer from this downturn and how long will the US cope with all this lost revenue due to coronavirus shutdowns. But, as we’ve seen before, markets play along a different set of rules. Take for example, when China announced the coronavirus US stock markets soon after rebounded to all-time highs. So, it wouldn’t be surprising at all to see markets turn higher even if the news gets worse. 

There were instances of forced selling last week, for example, Gold futures, which by the end of trade Tuesday stood at an extreme, with 90% of speculators long according to most recent CFTC IMM report. The subsequent sell-off in gold suggested a margin call of some sorts, which is seen by heavy profit-taking from recent winners, which category Gold futures fall into.

Getting back to the wave count, if Friday’s historic rebound didn’t exhaust the 4^th (corrective) wave and S&P 500 futures can cleanly take-out of the critical 2850/2900 region, then it would alter the wave-count and even further confirm this week’s low as a key trough. If, however, price-action in S&P futures fail here, it could set the stage for the final wave down.

The 5^th wave typically can equal the length and size of the first wave, which in this case could potentially bring the S&P down to the mid-2100 region, but more importantly, if the S&P were to fail here, the most important region to watch (to the downside) would be this week’s low of 2395.

Weekly Technical & Sentiment Report - March 9, 2020

Nasdaq-100 & 30-year Futures Speculators Caught Off-guard

Coronavirus Clouds Markets With Uncertainty

Equity markets opened the past unprecedented week by gapping down after a extremely bearish prior close.  That set the tone for the entire week and could indeed do so again later today (Sunday here in North America).

The fact of the matter is that markets hate uncertainty! And global risk aversion can continue to sell-off while the uncertainty of the direction of the virus continues. But if you listened to Federal Reserve Chairman Powell on Friday, central banks around the world look to have inched one step closer to intervening in the markets to give the necessary confidence back to the markets. And that is why we saw a hectic week of forced selling end in a positive way on Friday.

But will intervention be enough?? Maybe for the short-term, yes. So far, CDC officials have been extremely accurate with the virus' progression here in the states and foresaw the death that occurred over the weekend here in the US. But, ultimately, there seems to be stages of uncertainty that will need to be peeled-back until global markets see this bout of extreme volatility pass.

It is the affect of the Corona-virus on the global economy that weighs most on investor's minds. At first it may seem shocking, like the Chinese PMI, which plummeted to record lows over the weekend. But here in the states, it might take weeks or months until we see the full brunt of the economic affects. This, however, is a crisis of confidence, which has caught many participants off-guard.

The first thing we will need to see if immediate confidence is restored back to the market, which we  got a small dose on late Friday, is when there's global intervention. If there's follow-through to last week's selling, I expect the Federal Reserve and such to step-in this week. This would definitely temporarily restore confidence, but the question to sustained long-term stability depends on a couple factors.

According to Morgan Stanley, the likeliest scenario is that the virus takes the middle course in terms of disruption and lasts into May. This is dependent, however, on containment of the virus, which has been clearly outlined by CDC and various health officials that could most likely take a few more weeks to give the markets the clarity it needs to move on from this period of chaos.

Most importantly to watch, however, will be is the reaction of the financial markets, which once the expected intervention by central banks wear off will be instrumental in deciding how long the road to recovery will be. More specifically, once sentiment has reached an extreme low, history has shown that the selling pressure has likely exhausted. In this case, once the amount of companies trading below their 200-day moving averages in the S&P 500 reaches under 10%, like we saw at what I like to call the "generational low" we saw on Boxing day 2018. There, we saw the measure dip below 10% briefly, which is not terribly far from where we are currently (23.46).