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Coronavirus and Markets - impact on stock indices


Stock exchanges are experiencing one of the worst periods in history. NASDAQ fell more than 30% since the last peak, the SP 500 fell by 35%, the British FTSE 37% and the DAX lost even 42%. Amazing is not only the depth of the plunge, but also its speed, because these losses occurred essentially in 4 weeks. The growth, which had been lasting for years, was erased within one month. What the  SP 500 added since President Trump was elected, has been recently wiped out and it is currently traded on the levels at the beginning of his term.

Such declines indicate that markets are officially in a bearish trend, which is considered when the prices drop 20% or more from the last peak.  The markets are also reacting sharply because there was very long bullish trend and prices were high mainly due to the policy of low interest rates and long-term quantitative easing.

The economic data, however, had showed that cooling is coming. PMI indices in Germany indicated  a contraction of the economy since January 2019, when they consistently fluctuated below level 50. New unemployment data should confirm a significant jobless data increase across the global economy.

As a result of current emergency measures to prevent the spread of coronavirus, the shares of banks, travel agencies and airlines suffer in particular. The problem for European banks is that they have not fully recovered from the 2009 crisis. Although they are better capitalized, they still have a high volume of bad credits in their balance sheets, which is likely to increase now. In any case, the actions of central banks give hope that the banking sector will survive. One of these steps is the unlimited QE announced by the Fed on March 23, 2020.

The development of US indeces will be very important for the upcoming US presidential election. President Trump will do his best to ensure that his first term can be considered as successful. That is why we can expect further massive stimulus packages, which will sooner or later support the shares in growth. The US Senate has already approved $ 2 trillion in economic support.  
 

Technical analysis as at March 25, 2020

Shortly to explain the bear market, it has 4 phases:

  • The markets are at high prices. Towards the end of this phase, investors leave the market and take     in profits.
  • Steep decline phase. This phase has already happened.
  • Consolidation phase. Speculators enter the market and gradually increase prices and trading volume.
  • Slow down phase. Good news and low prices are starting to attract investors, so the decline is slowing down and the bear market is starting to turn to bull market.

It is impossible to correctly determine the bottom of the bear market.
The moving averages we use in the technical analysis are EMA 50 - orange line, SMA 100 - blue line and SMA 200 - green line.
 

The NASDAQ

 

First, let's take a look at the NASDAQ on a weekly Chart in Figure 1: 

Figure 1: The NASDAQ on a weekly time frame

There are several interesting points. Above all, the price drop halted at the moving average of SMA 200 (see point B), which acted as a support in the band of 6 600 - 6 700. At the same time it is a level of 78.6% Fibonacci distance between points XA. At point X, there is another support in the band of 5 850 - 6 000.

Points C and D show how hypothetically the price could move further. XABCD points define the harmonic pattern of the Bullish butterfly. If this pattern was fulfilled, the price could fall to 4,800 points (see point D).

In the bearish trend, it is better to look for places where to speculate on the decline. These could be near of some of the identified resistances:

Resistance 1 is on a level of 7,700 - 7,800. It is a Fibo of 38.2% of the drop between points A and B.
Resistance 2 is in the band of 8 500 - 8600 (see point C). There is Fibo 61.8% of the drop between points A and B here. At the same time it is the level on which the daily chart EMA 50 crossed below SMA 100 and thus confirms the downward trend.
 

The SP 500 index


There is normally a correlation between the NASDAQ and the SP 500, but we identified interesting differences between the two of them now, as shown in Figure 2:
Figure 2: The SP 500 on a weekly time frame

Unlike NASDAQ, the SP 500 moved below the moving average of SMA 200 and also below the last significant low at point X. It even traded briefly on levels from November 2016, when Donald Trump was elected as the US President.

Resistance 1 is in the 2600 - 2650 range. This level is around the moving average of SMA 200 on the weekly graph and at the same time it is Fibo 38.2% of the movement between points A and B.
Resistance 2 is in the zone 2 720 - 2 750. Here, the previous support was broken.
Resistance 3 is in the band 2 910 - 2930. There is Fibo 61.8% movement between points A and B here.

The closest support is in the zone 2210 - 2170. If broken, the price could then drop to the band 2,050 - 2,070, where the Fibonacci projection 127.4 % from the distance between the XA points is.
 

The DAX Index


The DAX index dropped to the value of 7,986, which was last traded in June 2013. The index has a significant share of the automotive sector (VW, Daimler, BMW, Continental), which was facing a decline even before the outbreak of the coronavirus epidemic. 
Figure 3: The DAX on a weekly time frame

Resistance 1 is in the band 10 250 - 10 450. It is the level where previous support was broken and at the same time it is a Fibo level of 38.2% of the drop between AB points.

Resistance 2 is in the wide zone 11 080 - 11 500. When the market opened, there was a gap that tends to fill, and at the same time it is an area of ​​previous support that has been broken too.

The closest support is in the band 8 000 - 8 261.

When trading this index, it should be borne in mind that the DAX is a market that is very fast and current significant volatility can make a significant change in your account even with the trading volume of 0.1 lot. For example, if you entered a short trade on the 10 250 level at the first resistance, then the distance to the nearest support with a volume of 0.1 lots could generate a profit of approximately  CZK 130,000. A stop loss that you would place above 10,560 would mean a risk of approximately CZK 20,000.


The FTSE 100


The FTSE 100 is specific in that, in addition to the coronavirus pandemic, Brexit has an impact on the performance of the index, where the setting of trade relations between the UK and the EU has not yet been finished. The trade war in the oil market also has a big impact, as large oil companies such as BP are represented in the index. Under the influence of these factors, the index fell to the levels when it last traded in August 2011. 
Figure 4: The FTSE 100 on a weekly time frame
 

Significant levels of resistance and support are as follows:

Resistance 1 is in the band 5 700 - 5 900.
Resistance 2 is in the zone 6 230 - 6 410. Here, as in the case of DAX, there is a gap to be filled.

Support 1 is in the band 4 780 - 4830. It is the band that worked as a support in 2011. The second test of this zone has now taken place.
Support 2 is in the zone 4 060 - 4 080, which is the support level ​​from July 2009.

Finally, we want to remind readers that the current volatility on all stock indices is extreme. Therefore, the distance of stop loss orders and trading volumes should be adjusted accordingly. Trade sensibly and do not risk more than 1% of capital per trade. 


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