Coronavirus and stock indices in the week from 26/3 to 1/4/2020

Stock indices passed the first quarter of 2020, which is one of the worst in history. The Dow Index has fallen by 23.2% which is the worst decline since 1987. The SP 500 recorded a decline of 20%, the worst drop since 2008. Although the indices ended last week with a sharp rise supported by the approval of gigantic support in the US economy amounting to 2.2 trillion USD, the week as of  March 30 began with a decline again under the influence of reports of exponential growth of pandemic around the world.

Fundamental analysis

The sectors that are currently suffering the most are tourism, aviation, logistics, transport, hotels, restaurants, etc. However, other sectors, where the deeper impact of the crisis is beginning to show itself, are also emerging. One of them is the steel industry.

In the USA, for example, car sales are expected to fall by 80% this year. Car makers have discontinued production and this poses a major problem for European steel producers, that are strongly linked to the automotive industry. The difference with the 2009 crisis is now that the previous crisis was preceded by strong years so steelmakers entered a crisis with financial reserves. Now, however, even 2019 was not good for the steel industry so many companies had to use their financial reserves in the last 6 months. Companies with high leverage will therefore have significant problems.

In this context, it is worth mentioning that the global debt amounted to a record $ 253 trillion by the end of 2019, of which $ 19 trillion is due in 2020. It is already likely that this amount will not be paid this year. Not only indebted companies but also countries can bankrupt. These concerns arise especially in countries such as Turkey and South Africa, where a large part of GDP comes from tourism. Therefore the ongoing crisis may surprise with completely unsuspected dimensions.

Current Statistics:

  • Worldwide coronavirus infections exceeded 950,000 cases detected. There are more than 215,000 in the US, 110,000 in Italy and 110,000 in Spain. To date, 3,600 people are infected in the Czech Republic.
  • In Germany, they are considering  immunity certificates. Who will be identified by testing to have coronavirus antibodies will have this confirmed in the certificate and will not be subject to any  restriction measures. This approach could reduce the economic impact of the current crisis. The United Kingdom also ordered 2 million antibody tests from China.
  • Economic data point to deepening economic problems. Last week, the number of insurance claims in an unemployment in the US reached a record number (3.3 million applications). Similar numbers can be expected this week.
  • PMIs on manufacturing purchasing managers activity reported this week show strong attenuation in Japan (PMI 44.8), South Korea (PMI 44.2), Italy (PMI 40.3), Germany (PMI 45.4). China's PMI, by contrast, surprised with the positive value of 50.1, which shows that the economy is starting again in this country.

Technical analysis as at April 1, 2020

The markets are now in the bear market, with a sharp downturn. 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 Index


First, let's look at the NASDAQ Weekly Chart in Figure 1:

Figure 1: The NASDAQ on a weekly time frame

There are several interesting things to note. In particular, the price stopped on the moving average of SMA 200 (see point B), which acted as a support in the band of 6,600 – 6,730. At the same time it is the level of 78.6% Fibo distance between points X and A. point X, where another support is 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). 
Figure 2: The NASDAQ on a daily chart

In a daily chart we can clearly see the bearish trend, because the so-called death cross was created at point 1, when the EMA 50 came under SMA 100. Even stronger signal is starting to emerge at a point 2. In the bearish trend, it is better to look for trades to speculate on the decline.

These could be near some of the identified resistances:

Resistance 1 is on a level of 7,890 - 8,000. This is the Fibo level of 38.2% of the drop between points A and B. We can see that the market stopped at this resistance and the last candlestick on April 1, 2020 is clearly bearish. 

Resistance 2 is in the band of 8,500 – 8,600. This is Fibo 61.8% of the drop between points A and B. At the same time it is the level on which the daily chart EMA 50 came below SMA 100 and thus confirms the downward trend. Currently it is also the level where the average SMA 100 is.


The SP 500 Index

 There is a correlation between the NASDAQ and the SP 500, but there were interesting differences between them, as shown in figure 3: 
Figure 3: The SP 500 on a weekly time frame

Unlike the NASDAQ, the SP 500 was below the moving average of the SMA 200 on the weekly chart and also below the last significant low at point X. It even traded briefly on the levels where it last traded in November 2016, when Donald Trump was elected the US President. 
Figure 4: The SP 500 on a daily chart

The daily chart shows that there is  EMA 50 below SMA 100 (point 1), but also below SMA 200 (below 2). This is a strong bearish signal. As for the NASDAQ, also here the price stopped on the nearest resistance last week.

Resistance 1 is in the band 2,630 – 2,650. This level is around the moving average of SMA 200 on the weekly chart and also 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 formed on the weekly chart was broken.

Resistance 3 is in the band 2,910 – 2,930. This is around Fibo 61.8% of the movement between points A and B.

The closest support is in the zone 2,210 – 2,170. 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 fell to 7,986, which was last traded in June 2013.

Figure 5: The DAX on a daily chart

We can see also here that on the daily chart moving averages clearly signal the bear market and the EMA 50 is below SMA 100 and below SMA 200.

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 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 was broken.

The closest support is in the band 7,986 – 8,261.

When trading this index, it should be borne in mind that DAX is a market that is very fast and significant movements as it does nowadays can make a significant change in the account with trading volume of 0.1 lot. For example, if you entered a short trade in the 10 250 zone on 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 be approximately CZK 20,000. 

Trade sensibly and do not risk more than 1% of your account.

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