Technical Analysis: 27 February 2020

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Violeta Todorova
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By Violeta Todorova
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Senior Technical Analyst
Date posted:
27 February 2020, 10:21 AM

S&P 500

In our last update on February 21, 2020 we highlighted the overbought nature of the index and discussed that a short term pull back is imminent and highly likely.

We were concerned that fears of the Covid-19 disease spreading are intensifying, that the uncertainty about the U.S. presidential election could start to drive markets, the lofty valuations, the overbought and deteriorating momentum conditions and the steady decline in Government bond yields as investors seek save havens.

A sharp decline unfolded over the past three days and the S&P 500 has lost 275 points from its peak on February 19 to its low on February 25, or 8.10%. According to Dow Jones Market Data, the index saw its sharpest-ever two-session slide in point terms.

The index broke down on Monday, creating a gap between 3259 and 3328, which is likely to act as resistance in the near term.

It’s always hard to predict how far and how long corrections would last, but it is clear the nature of the decline is impulsive, which leads us to believe that the decline is likely to unfold in three wave fashion. The weekly RSI indicator completed a failure swing point from overbought territory which also point to a deeper pull back.

The prior low was broken on Tuesday, confirming an imperfect double top pattern and showing that the up trend from the December 2018 low is deteriorating. The initial downside target based on the breakout is 3035.

In the short term, the index is oversold and a corrective rally to unwind the oversold momentum readings is likely to take place soon.

Such rallies usually retrace at least half of the prior decline, therefore a rebound to 3260 could be seen soon.

The most likely scenario is that a lower high could form on the chart before leg 3 down takes place.

While at this point, we don’t have signals the primary up trend is reversing course, we expect the volatility to remain elevated in the coming months.

S&P/ASX 200

In our update last Friday we discussed that the S&P/ASX 200 is overbought on a short term and long term basis and highlighted the likelihood of a short term pull back.

An impulsive decline took place with the XJO declining from a high of 7197 to a low of 6690 on Wednesday, which is a 7% drop.

The long and medium up trend lines on the RSI indicator are broken downwards, which suggests that Wednesday's low is unlikely to be the bottom of the current correction.

Given the impulsive nature of the decline, our baseline scenario is for a three wave decline, with the current pull back being part of wave 1.

Key support to monitor is the August 2019 low of 6396 as a break below it will end the secondary up trend and trigger further weakness in the coming month(s).

At this juncture in time, the almost 11 years old primary up trend from the March 2009 low is still intact, but we favour a deep pull back which could potentially bring the XJO to 6200.

It appears that in just over a weekend the complacency about the fast spreading corona virus has turned into a growing fear about a pandemic, which led to a significant spike in volatility, which is likely to stay elevated in the near term.

Crude Oil

Crude oil has been trading sideways over the past year, fluctuating between $42.30 and $66.60. The key support of $50.50 has been broken downwards for a second time overnight, showing that selling pressure is building up.

The momentum indicators remain weak and we see a high probability of the price retracing to $43.00 in the near term where initial support is likely to hold.

The momentum indicators are approaching oversold territory suggesting that once the selling pressure eases, the commodity is likely to rebound in the coming months.

The potential upside price target is in the range between US$51.00 and US$52.00.

US 10 Year Bond Rate

The yield of the 10 Year US Bonds have peaked in October 2018 at 0.03262 and has been trending lower over the past year.

The rally in the bonds as investors continue to seek save heavens, pushed the yield to a fresh all-time low of 0.01298 overnight, which is the second violation below key support of 0.01389.

While yields could bounce in the short term, to unwind the oversold momentum conditions, over the long term, lower levels are likely to be witnessed.

Woodside Petroleum

After reaching and exceeding our price target of $36.00 in January 2020, the rally quickly reversed direction and the price has been trading in a downward trajectory over the past month.

The current price action has approached a band of support between $27.84 and $29.33 where initial buying interest is likely to arise. The weekly and daily momentum indicators have reached oversold territory suggesting that the price is likely to bounce soon.

Although at this point there is no clear sign the selling pressure is subsiding, given the proximity to a band of support and the oversold momentum conditions, we are of the view that the short term downside from here is likely to be limited.

Once the current correction is complete, the price is likely to rally to $31.80.

More information

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Disclaimer: Analyst may own shares. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents ("Morgans") do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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