Technical Analysis

The end of February was brutal for traders that were not prepared for the breakdown in the US stock markets. The breakdown in price actually started on February 20th and 21st. Most traders didn’t pay attention to these minor downside price rotations in the Technology sector (NQ) and the Financial sector. The early downside price rotations in key sectors gave traders a bit of a warning that the markets were starting to shift away from the earnings-driven rally that had set up the recent peaks.

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As skilled traders, we need to try to stay ahead of these events, attempt to predict where risks and opportunities will arise and work to protect our assets while attempting to trade within these market events. What happens if this event turns into an extended downside price rotation? What happens if, collectively, the global central banks can’t support the markets as consumers globally move away from traditional spending and shopping activities? What are the longer-term implications of this event as it unfolds? Could this Virus event turn into a Global Deflationary Depression?

There are a few positives we need to report originating out of the US and Israel. News of a potential vaccine produced by a Texas firm and an Israeli firm has been announced over the past 10+ days. Both firms believe they will be able to engage in human trials of these vaccines within a few weeks. Our advanced technology and computerized modeling systems allow us to respond to these types of virus events much faster than ever before. If these vaccines are successful and can be distributed in mass throughout the globe, we may see this virus event come to a sudden positive conclusion.

The other good news is that the Corona Virus appears to be far less deadly than even the common Flu or Cold. Currently, the reported numbers are (roughly) 87,000 infected and 3,000 deaths. That results in a 3.4% mortality rate. The 2019 mortality rate for pneumonia and influenza was 6.9% (Source: https://www.cdc.gov/). The reality of the situation on the ground is that we will know more about these data points as we progress further in time. Numbers change as the total scope of the issue is determined.

As skilled traders, our objective is to protect capital and identify opportunities for profits. As horrible as it may seem to look at this global event and try to find ways to profit from it – that is really our main objective. We’ve been getting calls from friends and clients asking us “should I buy airlines and other sectors right now? This seeming like an incredible opportunity to buy into this weakness?”. Our answer is a bit more complicated as we are attempting to predict the future event and we don’t believe the bottom has setup/formed yet. The simple answer is “NO, you should not be buying into this weakness until we know a bottom has setup and risks to the global economy are more settled”.

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7,971 is the key for the bearish to be continuing

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Much of the same can be said for the DAX 30. With the ECB following in the footsteps of the BOJ and Fed and the subsequent reaction of the indices last week, it would appear sentiment has improved somewhat, and investors may look to wade back into the market should risk trends improve further.

That being said, forthcoming commentary from ECB’s Governor, Christine Lagarde, may be crucial in continuing the positive trend. She is slated to speak on Tuesday and will likely offer further insight on the central bank’s response to the crisis.

Apart from commentary, forecasting the impact on upcoming data is near impossible as many of the readings are pre-outbreak so they do not encapsulate the debilitating effects of the coronavirus. Further still, many central banks and governments have become increasingly proactive in their policy decisions – opting to make announcements outside of the scheduled meetings. As a result, the outlook for the week ahead is neutral.

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• Mexico’s main interest is downgraded to 5.5% to aid the economy
• The Mexican Peso’s carry trade value is still favourable for the currency
• USD/MXN nearing the end of a symmetrical triangle pattern

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• Market volatility resumes as traders keep an eye on increasing infection rates.
• USD/MXN holds on to support but fails to break a key resistance.

The Mexican Peso leads emerging market currencies higher on the back of dollar declines in a week where increasing political tensions have dominated market sentiment.

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The Dow Jones Industrial Average was up 0.4%, over 100 points, on Thursday, while the S&P 500 rose 0.4% and the tech-heavy Nasdaq Composite gained 0.5%.

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Stocks jumped after a bigger-than-expected increase in jobs last month: The Labor Department reported that 4.8 million jobs were added in June—more than the 2.9 million expected.

The unemployment rate fell to 11.1%, down from 13.3% in May. The jobs data for June was collected in the middle of the month, however, before a spike in new coronavirus cases cropped up across the South and West.

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The Japanese Yen is ending the week on a very positive note against the US dollar, and trades below USD/JPY 106 in holiday-thinned conditions.

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Consumer prices in China were up 2.4 percent on year in August, the National Bureau of Statistics said on Wednesday - in line with expectations and slowing from 2.7 percent in July.

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Crude oil prices may seesaw between fiscal talks and corporate earnings with Brexit woes and the policy implications for a growing number of Covid-19 cases.

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The US dollar is unloved, oversold and at lows last seen over 30-months ago. At the moment there seems to be very little reason to buy the greenback

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The upcoming US economic calendar is loaded with high rated event risk, as well as the January Fed meeting – which unfortunately might not bring much volatility.

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