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Coronavirus and stock indices in the week from 30/4 – 6/5/2020

Today, the indices are at about the same price levels ​​as a week ago. The incentives adopted by central banks and governments to fight the coronavirus continue to have a positive effect on the indices. There was some short negative impulse for further growth last week when reports of rising tensions between China and the US appeared, which sent major indices in the red, but bulls picked up again this week and it seems nothing can stop them in the era of unprecedented economic stimulus.

However, there is still some nervousness in the marketvsignaled by the VIX index, which is around 30 points, which is well above the normal value of 15 points. In addition, the indices continue to move near the strong levels of resistance. So will be an old saying about selling in May and going away true this time?

Fundamental analysis

The situation regarding coronavirus is gradually stabilizing and the increase in new cases has stabilized at around 75 thousand cases per day. The development of newly recorded cases is shown in Figure 1: 

Figure 1: Daily increase of the coronavirus infected people

Worldwide, the coronavirus infections have already exceeded 3,820,000 cases. Figure 2 shows the distribution of the disease in countries.

Figure 2: The distribution of the coronavirus infections

Previous WHO warnings of a massive pandemic spread in African countries have not yet been fulfilled. The question is if a possible 2nd wave of the disease comes in autumn and how it may influence the markets.
 

From the last week’s important economic data we select:

 
  • In the US, more than 30 million people have applied for support in unemployment since March 2020. Analysts expect this number to increase by at least an additional 3 million this week.
  • US PMI in production (ISM PMI) for April fell to 41.5 (previous month 49.1).
  • The German PMI in production fell to 34.5 (the previous month it was 45.4). A PMI of less than 50 indicates a contraction in the economy.
  • Production orders fell to -10.3% on a month-on-month basis in the US in March (previous month - 0.1%).
  • PMI in services in the UK fell to 13.4 in April (it was 34.5 in March).
  • Retail sales in Canada fell to -15.6% in February.
  • In Australia, retail sales improved significantly to 8.5% in March (0.5% in the previous month). In this country, the economy is already beginning to take off as China's economy continues its restart as well. Chinese exports exceeded expectations and grew by 3.5% in April (analysts expected a decline of -15.7%).



It is obvious that economic data for 2Q 2020 will be bad and the markets have already priced this information. The question is whether the data can significantly surprise and especially how the situation will affect the data for 3Q 2020. The situation could also be significantly aggravated, for example, by the resumption of the trade war between the US and China. Another question is how consumer behavior will change once restrictive measures are fully released and at what rate a consumption can be restored. It will depend a lot on how quickly can be lost jobs returned back into the economy. 
 

Technical analysis as at May 7, 2020

The situation has not changed much since the last analysis. The monitored indices continue to grow, even though the lower rising trend line has been broken in all indices. However, this signal for trend reversal has not manifested itself yet.

The moving averages we use in the technical analysis are EMA 50 - orange line, SMA 100 - blue line, and SMA 200 - green line. In addition, the charts are amended with so-called hidden 123 gaps, which work as resistances and supports as well.

 

The NASDAQ 

 

The NASDAQ is an index that has strengthened the most of all monitored indices and it continues to strengthen, as we can see in Figure 3, where we have the NASDAQ index on a daily time frame:

Figure 3: The NASDAQ on a daily chart

The NASDAQ got to a significant resistance at 78.6% Fibo of the XA movement. At this level, however, one reaction has already taken place, and the bulls might be successful in the second attempt to break through the level. Above it, there is a gap that might be filled.

Resistance 1 is at the level of 9,100 - 9,150. After breaking, the upper part of the gap in the range of 9,400 - 9,500 is the next resistance.                  Support 1 is at the level of 8,360 - 8,450. The price reacted here to the hidden gap from April 14, 2020.

 

The SP 500


The price on the SP 500 is moving in a similar way to the NASDAQ, but we can see that it is still below the strong moving averages SMA 100 and SMA 200. In addition, the moving average SMA 100 is already below the SMA 200, which is a strong bearish signal. It seems that the index has found a certain equilibrium price and since April 9, 2020, it has been trading in the range of 2,730 - 2,970. 
 
Figure 4: The SP 500 on a daily chart

The lines between the AEBD points are reminiscent of a rising wedge, which often occurs in declining trends as a temporary correction. Decisive for further growth will be whether the bulls will have the strength to overcome the current resistance band, which is in the zone 2970 - 3000. The next resistance band is then between 3 107 - 3 140.

Support 1 is in the zone 2 720 - 2 740.


 

The DAX

 

The index continues to move below SMA 100 and SMA 200 moving averages. In addition, SMA 100 has already been moving below SMA 200 since April 15, 2020, which is a strong bearish signal, see Figure 5. However, the price seems to consolidate and even though the lower trend line has been broken between the AE points, it does not look like a convincing reversal of the growing correction, which began on March 19, 2020.

However, the index began this week with a declining gap, which is a certain bearish signal itself. A stronger confirmation of the change in the direction of the trend could occur when on an H4 time frame would be a situation of a bearish death cross (a pattern when EMA 50 gets below SMA 100 or  SMA 200). 
 

Figure 5: The DAX on a daily chart


Resistance 1 is in the range 11 320 - 11 720 (here, there is a gap that may fill).
The nearest support is in the range of 10 150 - 10 200.
 



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