Get your bottom fishing hooks ready – according to the probabilities

Get your bottom fishing hooks ready – according to the probabilities

den 9 mars 2020 författare Carlsquare

Correctly reported by the Chinese authorities or not, with the data at hand provided by Johns Hopkins, one can see how number of new Corona-cases in mainland China has been and continues to flatten out:

The Chinese state is also more or less trying to force people back to their workplaces. But the interest of going back from the Chinese people to get back to work seems weak. In an article from Caixinglobal.com, one can learn how workers leave the lights in the factories on just to make it look like people are working there.

However, the demand for energy is likely to be the best parameter to show when China is seriously starting to produce again. Below shows how daily coal consumption at six major Chinese power firms is lagging previous years:

The United States has not yet been hit as hard as many other countries by the Corona virus. Figures for unemployment in the United States came in at a strong 273,000 new jobs on Friday 6 March, compared to expected 170,000. The graph below shows the strong correlation between jobs created in the US economy and the development for the S&P 500 index. However, the stock exchange did not take this into account and fell in concern about the Corona virus last Friday 6 March:

We cannot help to notice a phenomenon that is extremely unusual. It historically only seems to have occurred once before: This is that many indexes and individual stocks fall not just below two standard deviations, but by three.

The Bollinger bands were created by John Bollinger to manage positions in active trading. He set bands based on two standard deviations from a 20-day moving average. The vast majority of outcome are captured within two standard deviations (about 95 percent). If it goes beyond two standard deviations, it means that something is extremely oversold or overbought. In other words, this is something you should trade against… so called mean revision.

But what has happened lately is that the market has been trading with three standard deviations, that is, and outlier with 0.27 percent probability according to the normal distribution curve.

Below is the S&P 500 index graph. In the green fields we have set the Bollinger bands to two standard deviations. Note that the index often trends nicely with these lines. The gray bands are set on three standard deviations. Note how this has constituted the levels that have been supported in the case:

In this case, one may start to consider whether it is a good idea to buy the dip, since you really have the odds on your side. Also, we could start to see the share of a double bottom formation.

The same three standard deviation applies for EUR/USD:

But everything is a matter of timing. One may argue that the normal distribution since long is known not to be applicable to the stock market. Instead one should add the fat tails to the distribution curve.

Anyway, the market is anything but calm. The Fed lowered its interest rate by 0.5 percentage points a week or so ago, which was followed by support from the IMF. If you look at the Fed's balance sheet, you can see that it is growing again. Thus, the Fed is back in and buying:

The graph above shows the S&P 500 index in red and Fed's growing balance sheet in blue.

But the market is expecting further rate cuts from the Fed already by March 18. Once again, the Fed has been out of step with developments. The only thing that can be done now from the Fed is to slow down and wait for an improved timing.

Buying support from the Fed and expectations of further rate cuts is all bullish news for the stock market. But Nasdaq also fell during Friday´s trading though managed to bounce upwards on support. The next level to be broken on the upside is Fib 50 and MA100:

The OMXS30 index reached a new local bottom formation on Friday 6 March in the wake of the Corona virus:

Support on the downside is found at 1 620 followed by 1 575.

The DAX index is getting close to the bottom from August 2019 and no sign of a double bottom formation can be found here:

The Gold price has managed to gain momentum after the first round of margin calls. Worries of the global economic outlook as well as a weaker USD is fueling the metal.

Note how the psychologically important level of 1 700 is approaching. Last time the gold price was above that level was in 2012.

Below shows the Boliden share along with copper. There is absolutely a correlation between these two. As can be seen both copper and Boliden are trading close to their support levels. In case of a break in copper, it is not unlikely that Boliden will follow.

In order to find the next level on the downside, one should go back to 2015 to identify the SEK 165-level.

Looking at bitcoin, one could ask whether it is a scary head and shoulder-pattern that we see. The neckline does serve as a pretty strong support, also made up by MA100 and Fib 50. But a break below and the patterns call for further downside to the 6 840-level:

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.


2020-09-19 20:41:09

 

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