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The coronavirus and stock indices in the week from 22/4 -29/4/2020

The indices continued to grow last week, which may seem surprising given the influx of weak macroeconomic data. The NASDAQ index, for example, has already erased 78% of the March slump. The VIX (fear index) is gradually declining and is currently hovering around 30 points. So the situation seems to be gradually calming down. However, the indices are at levels of interesting resistances, so many traders may wonder if it is the time for bears again?

Fundamentální analýza

Yesterday's index growth was fueled by improved sentiment in oil markets and hopes that the optimistic results of a trial of Gilead's new drug redemsivir, which shows that the drug contributes to  faster recovery from coronavirus, will lead to a faster release of restrictive measures. Shares of Gilead strengthened strongly yesterday.

However, there are still concerns about a possible second wave of the disease. Market caution is shown by low bond yields and, for example, US 10-year bonds remained at 0.6140% after yesterday's Fed meeting. Markets are still waiting to make sure that the spread of the virus is definitely under control. As far as vaccine development is concerned, no significant breakthrough has taken place so far.

Worldwide, the coronavirus infections exceeded 3,220,000 detected cases (as at April 29, 2020). Figure 1 shows the distribution of the disease by country.

Figure 1: Distribution of the coronavirus infection
 

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

 
  • In the US, more than 26 million people have applied for the support in an unemployment since March 2020. Today, that number will increase again. Analysts expect an increase of another 3.5 million. High unemployment will have a very negative effect on consumption.
  • The Fed kept the key rate at 0.25%. The Fed's governor said low rates would remain until the economy stabilized. Powell also feels that more support may be needed but while the Fed has powers when it comes to lending, it cannot influence the acceleration of consumption, which is crucial for economic growth.
  • GDP in the USA fell to -4.8% in 1Q. What will be important is how the crisis will affect GDP in 2Q.
  • PMI in manufacturing in China in April reached 50.8. In March it was 52.1, but still in February PMI was at a very low level of 35.7. The situation in China is therefore gradually improving.
  • Manufacturing PMI for April in Germany fell to 34.4. The previous figure was 45.4.
  • US consumer confidence fell to 86.9 in April (120.0 in March). Declining confidence in the economy suggests that consumers will spend less in the future.
  • The 1Q year-on-year CPI in Australia reached 2.2% year on year (up 1.8% in the previous quarter). This shows that inflation is still stable in Australia. Overall, there is good news coming from Australia as it begins to open up its economy, which is linked to China.
 

Technical analysis as at April 29, 2020

The monitored stock indices have been gradually rising since March 19, 2020 in essentially the same formations. All indices created higher highs and higher lows, which is a bullish signal and in such cases it is more suitable to trade with the trend.

However, according to Elliot's wave theory, it currently appears that the 5th wave is now running on all indices. At this stage, it is often the case that there are the largest number of buyers in the market and irrational reasons for growth may prevail. Markets are often overbought at this stage. As the indices are also at interesting resistances, the current rally could stop. However, for possible speculations on a decline in the current strong bull rally, it is advisable to wait for confirmation, which will confirm the idea of ​​a turnaround.

The moving averages we use in the technical analysis are EMA 50 - orange line, SMA 100 - blue line and SMA 200 - green line.

 

Index NASDAQ

 

The NASDAQ is an index that, after the slump that occurred in the period from 20/2/2020 to 19/3/2020, is strengthening very fast. It has already erased 78% of the slump.

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

Figure 2: The NASDAQ on a daily chart

In the daily chart, the moving averages still indicate a bearish trend, when at a point 1 the so-called cross of death was created as EMA 50 got below SMA 100. From the point of view of price action the current movement is bullish, because at a point D, there is higher low than at a point B and at a point E there is higher high than at a point C. The bullish mood is also confirmed by the fact that the price is currently above moving averages. At the same time, however, the NASDAQ is near significant resistance 78.6% Fibo of AB movement. Purple Extreme indicates the price is overbought.

The confirmation of the trend reversal idea could occur when the rising trend line, defined by DE points, is breached downwards.

Resistance 1 is at the level of 9,000 - 9,100. This is the level at Fibo 78.6% of the decrease between points A and B. 
Support 1 is at the level of 8,360 - 8,450. The price here reacted to the hidden gap from 14.4.2020.

 

Index SP 500

 
There is a correlation between the NASDAQ index and the SP 500, but there are interesting differences between them. Above all, it can be seen that the price for the SP 500 is still below the moving averages, see Figure 3. The SMA 100 moving average is also close to the SMA 200 average. If the SMA 100 falls below the SMA 200, it will be a very strong bearish signal. 
 
Figure 3: The SP 500 on a daily chart

As with the NASDAQ index, CDEF points here indicate a bullish constellation of higher highs and higher lows. The price reached strong resistance at 61.8% Fibo of the overall decline between AB points and closed above it. At the same time, there is 78.6% Fibo of the movement for the month of March. 

Also here, for the idea of ​​a potential trend reversal, it is appropriate to wait for a confirmation, which could be the breaking of the trend line between the DE points downwards.

Resistance 1 is in the range 3 107– 3 140.

It is also possible to consider the moving average of SMA 100 and SMA 200 as a resistance, which is currently around 3000. At the same time, there is the upper edge of the hidden bearish gap, which was created on March 6, 2020.

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

Index DAX 
 

The DAX index moved upwards, similar to US indices, although it strengthened less than the NASDAQ or SP500, due to uncoordinated EU fiscal stimulus. The index is currently below SMA 100 and SMA 200 moving averages. In addition, SMA 100 has already fallen below SMA 200 since April 15, 2020, which is a strong bearish signal, see Figure 4.
 

Figure 4: The DAX on a daily chart

The price climbed to 78.6% Fibo of the March movement. In our case, there is also a confluence with the resistance at the level of the gap, which was created on March 9, 2020. As in the case of US indices, to confirm the idea of a possible trend reversal, it is worth to wait for the price to move in the expected direction. This can be done by a break of the rising line between the DF points.

Resistance 1 is in the range 11 350 - 11 450.

The nearest support is in the range of 10 750 - 10 820. There is a break of the previous resistance.
 

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