Second wave or not?

Second wave or not?

15 June 2020 from Carlsquare

This week was marked by a discussion about whether a second wave of the Corona virus was going on or not. It didn´t matter if you read articles about the pandemic or the stock exchanges because the questions are the same. In both camps the discussion is as hot as uncertain. In our morning letter this Thursday we started with the picture below.

The Asian exchanges were still neutral when the letter was released but it was really this theme that took hold. It should also be noted that Black Lives Matter and other protest movements mean that police and authorities around the world are cautious in their actions against demonstrations and protests, which probably means that the pandemic can get a foothold.

The S&P500 index never managed to fill the gap. Note how the two blue lines that we drew as symmetry were also fulfilled. After that, the S&P500 has come down to the logical MA200 which act as a support. Last Friday, a black candle was issued. This is never a good signal since it shows that bulls are on the defensive, despite that the index was closing on plus. We have elaborated on how this week´s upcoming option expiry can create a new trend. Possible positioning for this is already underway.

If we dig into the S&P500 at the 2 hour-level, two things turn out. First, the exponential development hold, which we cautioned.

Second, the rising line was broken. A rule of thumb is that the fall will be as large as the base of wedge. However, this is not a clear wedge, so you can take this with an extra pinch of salt.

Note that there are two graphs with the same set-up above, though drawn in completely different ways. We often hear from our readers that they think that all these lines are designed by computers. They are not, but it is an art to draw these lines. But it is true that this is an area of art that computers are rapidly eating into. Today, the graphs are not much more than representation of how computers control the trading…It is our job to try to mirror and anticipate this.

We were very early out to monitor the Corona infection and its impact, but the situation is too unclear right now for us to have any strong opinion. But we retain our previous view that we are skeptical that the economic recovery can occur as quickly as the stock exchanges indicates. The markets are mainly governed by an excess supply of liquidity created by central banks and governments.

But if you look further ahead, the economic damage to society is probably far greater than the central banks pump in the form of support. The image above is from Realinvestment-advice/ZeroHedge and gives an idea of the problem.

Typically, there should be a relation between the stock exchange and the underlying economy, since the listed companies together constitute a substantial proportion of the economy. During periods, the stock market can of course be ahead of GDP if the supply of liquidity is large, the enthusiasm high and the availability of alternative investments low. But over time, these gaps should be closed.

The picture above illustrates just this. If we can see signs of a rapid recovery, then, given key figures such as PE, it justifies today´s fundamentally expensive stock exchanges. Then we can overlook Corona as a gigantic blip in the big upturn. The blip is then smoothed out by all supports.

But if the economy continues to trend downwards, then the stock exchange also probably will be pushed down.

There is very little that in our eyes points to a speedy recovery. But it is of course also that at this very point we are happy to be wrong!

For us the basic rule is to follow the trend, whether it points up or down.

Looking at the past week´s trading on the New York Stock Exchange, energy, financial and engineering companies has weighed down, which means they last bought, becoming the first to throw out when the market turned down. Tech continues to be the leader in terms of being most resilient in the downturn. Fundamentally this is reasonable as there are plenty of tech companies that continue to perform fundamentally well.

The Hertz share was up 37 percent last Friday. Company management has turned to a judge and asked to make a new share issue now that the interest is so great, which he has approved. Hertz will therefore raise up to 1 billion USD, were those who subscribe to this new issue should be aware that they never might receive any money back. The stock has received a letter from the stock exchange about an upcoming delisting, so the process could be considered crazy.

As mentiond, Nasdaq is a leader. Note how the index balances both on the old top and on the rising trend line. In other words, this is a strong support. This level is super important for all computers and charters in today´s trade so keep track of the development. However note how MACD has generated a weak sell signal.

The graph for the FAANG companies looks the same, but it has a doji since last Friday (=uncertainty). It wants buyer to come back today, where Mondays tend to be strong trading days.

The “N” in FAANG stands for Netflix. As shown in the graph below, the Netflix share is under pressure but supported by Fibonacci 23.6 as well as MA50 and the rising trendline. Note the negative divergence with MACD. A break below support-levels and the next level is found around USD 189:

The “G” in FAANG stands for Google (Alphabet) and this stock is also under pressure. Holding up the share is MA20 and the rising trendline. A break on the downside calls for a good downside to the next level found around 1330 USD where Fibonacci 61,8 as well as MA100 meet up:

German DAX index never managed to reach the gap. EMA9 have been broken so the hope now stands for a strong MA20. Also, note how MACD created a weak sales signal. MA100 around 11 465 serves as a first support on the downside followed by Fibonacci 50 and MA50 around 11 000:

OMXS30 bounces close to the support of 50 percent Fibonacci but fell below MA20 and MA100. Also note how a weak sell signal has been created in MACD. A quick bounce is needed so as not to tear apart the positive image. Mondays, however, are usually strong trading days…

Gold companies (GDX) in the US are trading in a downward trend:

…while the gold price itself continue to consolidate under negative divergence with MACD:

The USD has strengthened quickly when the risk aversion returns to the market. Below is the pair EUR/USD. A break below Fibonacci 23.6 and the next level can be found at MA20 around 1.114:

Legal notice

This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capitalprotected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

12/08/2020 05:01:29

 

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