Hi everyone, it has been a while since my last post. I was away on a week-long business trip in Jakarta and did not have the chance to post anything. Due to the COVID-19 outbreak, the trip was rather uneasy for me but my travel experience will be for a future post.
While I was away from Steem, it has been an interesting week. About a month ago, when the COVID-19 virus was spreading in China and Asia (even before it was even named COVID-19), I wrote this post on how it can potentially affect the stock market. I talked about the impact of the virus being underestimated and stock markets should be taking a more than 10% drawdown based on past pandemic situations.
It seems after a month of "incubation period" the stock markets are finally showing some "symptoms". From the highest price point on 19th Feb, to the lowest point yesterday, there is a 15.7% drawdown for SPY (ETF tracking the S&P 500).
Slicing through near-term meaningful supports
The next question will naturally be, "how low can it go?". On the daily chart, the price action has sliced through the 50d (green curve), 100d (orange curve) and 200d (red curve) moving averages.
Looking at the weekly chart, the price bounced off the 100w (orange curve) moving average last night at about 288. Which is a good sign and it probably mean that is a possible support. It is also interesting to note that this is also a 76.4% Fibonacci retracement level on a monthly chart since June 2019. Hence, I think the 288 level will serve as an important support next week.
If the 288 level does not hold, I think we will be testing the 200w moving average of around 263. Notice that the 263 level is also near the long-term trend line (in yellow) that stretches to the great financial crisis in 2008/09.
Feds jumping into action
Given how fast and furious this sell-off is, it is unsurprising that the Federal Reserves will jump into action. In fact, they have made an announcement yesterday that they "will use our tools and act as appropriate to support the economy". This means that many investors will be expecting a rate cut from the 17-18 March FOMC. Depending on the situation, the Feds may even hold the meeting earlier.
Conclusion
Given that the Feds still have room to cut rates, I think the sell-off will be temporary. However, there is still a chance for SPY to hit the lower support of 263 level given how fast and furious the sell-off is. If you noticed from the charts, the 200w moving average was tested during the December 2018 sell-off. We might see a similar pattern in which there is a bounce from this level, then a further sell-off to the 200w moving average.
The next couple of weeks leading into the March FOMC will give us more clues on how the market will respond. In the meantime, I will just be sitting on the sidelines and doing more research. I am looking at a few individual stocks that are oversold and will emerge strongly after this sell-off.
All these being said, it is not financial advice and please do your own due diligence since you are investing your own money :)
Personal disclosure that I sold a 305/294 bear spread last month and am now taking some profits.
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