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The coronavirus and stock indices in the week from 16/4 -22/4/2020

While, according to current statistics, the coronavirus infection appears to be gradually getting under control as the number of new infections is slowing down globally, the WHO has warned that the worst is yet to come and warns against ending of restrictive measures too quickly as it could trigger another wave of infection.

In any case, the indices continued to grow last week, even though the economic fundamentals clearly show the negative impact of movement restrictions on the economy. What seemed to be a quite convincing bear market in mid-March, when markets lost more than 30% of the value, is slowly beginning to fade in the context of the current indices ‘strengthening. However, there’s still a lot of uncertainty in the markets, and fear index VIX remains at above-average 40 points.

Monday's negative WTI oil prices, which none of us has ever seen, caused the indices to fall, but the indices strengthened again on Wednesday supported by the reports of another $ 500 billion package approved by the US Senate. So what further developments can be expected? 

Fundamental analysis

Currently, the most important fundamental questions are probably the following: When will the infection be stopped? When will the vaccine be available? What will be the next development in oil prices? And how quickly can we get the economy back on track? 

Worldwide, the coronavirus infection exceeded 2,590,000 detected cases (as at April 22, 2020). Figure 1 shows the distribution of the disease by country.

Figure 1: Distribution of coronavirus infections

As for the coronavirus vaccine, about 80 teams around the world are involved in research and the first trials are already underway. For example, the British Health Secretary Matt Hancock said on Tuesday that testing of a vaccine developed by Oxford University would begin on Thursday. However, most experts agree that the vaccine could be available in the first half of 2021. There are no guarantees that the vaccine will be developed.

As for the oil and the impact of its cheap price on stock markets, according to JP Morgan, energy shares account for only 3% of the SP 500 index and the impact of recent news is already included in prices. But the problem could be in the future if the US oil producers file for bankruptcy and fail repay their loans. Then the crisis would spill over into banks' balance sheets and this could negatively affect further developments in the indices. The situation with an oversupply of oil in the market has not indicated any signs of improvement that would support oil prices. 
 

From the important economic data last week we select:

 
  • In the US, more than 22 million people have applied for support in an unemployment since March 2020. Rising unemployment has a negative impact on the decline in consumption, which is the engine of the economy.
  • Industrial production in March in the USA fell by -5.4% month-on-month (in February it was 0.5%). For comparison, in the crisis in 2008 – 2009 it reached the lowest value -2.8%.
  • Retail sales in the US fell by -8.7% in March (down from -0.4% in February). In the crisis of 2008 – 2009 the lowest value was - 2.8%.
  • German sentiment index ZEW surprised with a value 28.2 (previous month – 49.5). It shows   investors ‘trust in economic improvement.
  • In China, industrial data were better than expected in March as the month-on-month decline was only -1.1% while in March it was -13.5%. However, this is not a reason for optimism yet, because the problem is the fall of global demand.
  • The US oil reserves have risen another 15 million barrels over the past week, according to the EIA.

That there will be bad data in 1Q/2020 is more or less clear and the market has already contained it. The key will be whether and how the crisis will affect the figures for 2Q and 3Q/2020. At that time, the US elections will take place and the state of the economy is one of the decisive factors. Trump will want to win the election, so it can be expected that if the current incentives are not sufficient to restart the economy, further support will follow, which could further strengthen the indices.



Technical analysis as at April 22, 2020

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 Index


The NASDAQ is an index that, after the slump that occurred in the period from February 20, 2020, to March 19, 2020, is strengthening very fast. It has already erased 62% of the slump. However, significant corrections are to happen in bear markets. The reason for current rise is that 48% of the index consists of technology companies, such as Netflix or Amazon, which might profit in times of quarantine. Nevertheless, it is not still clear how consumer behavior will change after quarantine.

In Figure 2, we have the NASDAQ index on a daily time frame:
Figure 2: The NASDAQ on a daily chart

On the daily chart, the moving averages still indicate a bearish trend, when the so-called cross of death was created in point 1 when EMA 50 got below SMA 100. But from the point of view of price action, the current movement is bullish, because at a point C there is higher low than at a point B and higher high at a point E than a high at a point D. The bullish mood is also confirmed by the fact that the price is currently above moving averages. However, the NASDAQ halted near Fibo 78.6 % and Purple Extreme is in the oversold zone. 

Resistance 1 is in the zone 9,000 – 9,100. It is the level Fibo 78.6% of the decrease between points A and B.
Support 1 is in the region 8,360 - 8,440. The price here reacted to the hidden gap formed on April 14, 2020.
 

 The SP 500


There is a correlation between the NASDAQ index and the SP 500, but there have been interesting differences between them. Above all, it can be seen that the SP 500 is still below the moving averages, see Figure 3: 
Figure 3: The SP 500 on a daily chart

Here too, the CDE points indicate a bullish constellation of higher highs and higher lows. However, the price stopped near strong resistance on 61.8% Fibo of the overall AB decline. The index also broke through the rising BC line and closed below it.

Resistance 1 is in the range of 2,900 - 2,930. Here, Fibo 61.8% of the movement between points A and B is. There is also a recent price high here.
Support 1 is in the zone 2,630 – 2,650.
 

The DAX


The DAX index moved similarly to the US indices and it has strengthened since March. The index is currently below moving averages and the price stopped on the Fibo 61.8% of the movement between high and low in March, see Figure 4:
 

Figure 4: The DAX on a daily chart

The index broke below the rising line, which is determined by BC points, and it is currently moving in the range of 10,200 – 10,800.
Resistance 1 is in the range of 10,740 - 10,830.
The nearest support is in the range of 10 150 - 10 210.
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