Technical Analysis: 12 March 2020

About the author:

Violeta Todorova
Author name:
By Violeta Todorova
Job title:
Senior Technical Analyst
Date posted:
12 March 2020, 2:10 PM

With Europe now the “New China” European bourses have suffered heavy losses over the past week. After the Bank of England cut interest rates by 50bp to 0.25% overnight, equity markets started the session strong, but by the end of business day were firmly in the red. The coordinated government intervention trying to stabilise the markets is still not helping sentiment.

This week the CBOE Volatility Index (VIX) hit its highest intraday level since 2008 amid stock market plunge that also registered as the worst one-day slump for the Dow Jones Industrial Average in 12 years. The surge in VIX may reflect that the markets, which have enjoyed a period of quiescence, even amid a few bursts higher, may be entering a paradigm shift. It looks like we may be in a new volatility regime for the foreseeable future. At present the VIX is different than 12 years ago because there are so many more products that are pegged to the index, but the breakout on the daily chart is clear and decisive and shows the market is currently facing two pandemics - the coronavirus pandemic and the fear pandemic. The fear pandemic did not just trigger the circuit breaks in the U.S. markets on Monday but also created a gap between the cash VIX and the VIX futures by more than 8 points, which is a rare and unusual situation. In 2008 the VIX peaked around 82%, which suggests that at present there is plenty of room to the upside. This means volatility is likely to remain elevated in the near term with choppy price action dominating the markets.

The World Health Organisation (WHO) designated the global spread of COVID-19 a pandemic, slumping all three benchmark U.S. indices overnight. A stock market rout does not usually unfold in a straight line fashion. Volatile and choppy trading is part of the process. Big down days are followed by big up days. This week we have seen such fluctuations- the Dow Jones Industrial Average endured a 2,000-point drop on Monday, a 1,000-point rebound and a 1,400-point reversal on Wednesday, bringing the index to a new low of 23,328. With investors rattled by coronavirus and chaos in the oil pits, we see no shortage of reasons for volatility to stay high. The U.S. indices are finding temporary support around the 61.80% Fibonacci retracement ratio measured from the December 2018 low. A 61.80% retracement indicates the market is in a weak state and with all indices in bear market territory defined by a drop of more than 20% from a recent high and the VIX index above its key resistance, we see a very high probability of a 100% retracement, which means that the December 2018 lows are likely to be re-visited. The current secondary trend is down and another sizeable rebound could be coming soon. But let’s keep in mind that selling the bounce has trumped buying the dip in previous periods of market upheaval.

The XJO is down 23% from its February 20, 2020 high and retraced almost 90% of the rally from its December 2018 lows. Further weakness could be expected in the coming weeks with key support of 5,400 to be closely monitored.

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