Dow Jones Broadening Wedge Test(Lower)
The Dow Jones saw another massive decline today, down -13% and nearly $3,000 in a single session making this the new record one-day point decline in history for the Dow and smashing the previous record of -$2,000 which was made last week. High volatility has been expected over the past two weeks and we are getting it in extraordinary fashion as traders appear to be experiencing emotionally-driven panic selling on top of the unknown in company and economic fundamentals which is causing selling as well. It is yet to be known how long this coronavirus is going to be affecting the economy as more states and businesses are forced into lockdown. Without knowing what impact this will have on revenue and earnings going forward, it makes sense to sell from a fundamental point of view, but the speed and rate of decline appear to be mostly emotional selling.
In the panic selloff seen today there may be a glimmer of hope from a technical perspective. Traders have now sold price down nearly -32% from the all-time high and are now testing the lower line of the broadening wedge pattern. We have yet to see a significant bounce during the decline other than the last minute bid witnessed as President Trump made the state of emergency declaration on Friday afternoon going into the market close. We saw a +10% gain mostly made in the last 15 minutes of trading on Friday which indicates that there is an appetite to buy the dip from traders, but the weekend news cycle put them back in fear mode by the time markets re-opened today. Such a strong fear mode that not even the Federal Reserve’s second emergency interest rate cut within a week-which took the Federal Funds rate down to 0%-nor the announcement of a return to Quantitative Easing could ease.
Markets are beginning to look very oversold in the short-term and I’m thinking we could see a technical bounce off of the lower wedge line if enough technical traders are still around and watching the charts. Along with the lower wedge line, there is also the horizontal support/resistance line stemming from the 2015 price peak which was created when the Federal Reserve announced monetary tightening by raising interest rates back then. Traders became fearful as rates went up as they feared it would slow economic growth, but ultimately began buying again as forward guidance from the Fed eased their fears. This red trendline is also another technical level where traders could be tempted to buy due the severe oversold conditions we are seeing, and due the fact that previous resistance levels normally turn into support in technical analysis.
Treasury Secretary Steven Mnunchin has also been working at a fast pace to provide some fiscal stimulus to the economy which is what traders mostly want to see aside from just Federal Reserve intervention in the banking sector. Fiscal stimulus would add much needed relief to not only struggling companies, but also to the American consumers via deferred tax payments for companies as well as a complete payroll tax suspension for employers through the rest of the year.
The expected fiscal stimulus amount is $800 billion, but Mnunchin and other economic officials could surprise markets with an even larger amount in economic relief which wouldn’t be too surprising considering that we’ve recently seen the Federal Reserve surprise markets with two emergency interest rate cuts within a week as well last weeks surprise announcement of $1.5 trillion in REPO.
If we get a combination of a price test of the lower wedge line along with more solid details of the economic relief package being pushed through the House this week it would give both technical and fundamental traders cause to buy at the same time which more than likely would lead to a record-breaking move to the upside. Whether or not that potential bounce would hold would largely depend on the coronavirus though. That is still the major unknown in markets right now and if case and death rates in the US continue higher and lead to more states shutting down, or potentially the entire country, traders could quickly return to selling.
For now the overall price trend remains down, but a bounce tomorrow or Wednesday is expected due to technical levels of support being reached and the expectation of a large amount of fiscal stimulus to be announced by Thursday.
Current view has now changed from bearish to neutral due to oversold conditions along with the technical levels reached and expected fiscal stimulus
In the panic selloff seen today there may be a glimmer of hope from a technical perspective. Traders have now sold price down nearly -32% from the all-time high and are now testing the lower line of the broadening wedge pattern. We have yet to see a significant bounce during the decline other than the last minute bid witnessed as President Trump made the state of emergency declaration on Friday afternoon going into the market close. We saw a +10% gain mostly made in the last 15 minutes of trading on Friday which indicates that there is an appetite to buy the dip from traders, but the weekend news cycle put them back in fear mode by the time markets re-opened today. Such a strong fear mode that not even the Federal Reserve’s second emergency interest rate cut within a week-which took the Federal Funds rate down to 0%-nor the announcement of a return to Quantitative Easing could ease.
Markets are beginning to look very oversold in the short-term and I’m thinking we could see a technical bounce off of the lower wedge line if enough technical traders are still around and watching the charts. Along with the lower wedge line, there is also the horizontal support/resistance line stemming from the 2015 price peak which was created when the Federal Reserve announced monetary tightening by raising interest rates back then. Traders became fearful as rates went up as they feared it would slow economic growth, but ultimately began buying again as forward guidance from the Fed eased their fears. This red trendline is also another technical level where traders could be tempted to buy due the severe oversold conditions we are seeing, and due the fact that previous resistance levels normally turn into support in technical analysis.
Treasury Secretary Steven Mnunchin has also been working at a fast pace to provide some fiscal stimulus to the economy which is what traders mostly want to see aside from just Federal Reserve intervention in the banking sector. Fiscal stimulus would add much needed relief to not only struggling companies, but also to the American consumers via deferred tax payments for companies as well as a complete payroll tax suspension for employers through the rest of the year.
The expected fiscal stimulus amount is $800 billion, but Mnunchin and other economic officials could surprise markets with an even larger amount in economic relief which wouldn’t be too surprising considering that we’ve recently seen the Federal Reserve surprise markets with two emergency interest rate cuts within a week as well last weeks surprise announcement of $1.5 trillion in REPO.
If we get a combination of a price test of the lower wedge line along with more solid details of the economic relief package being pushed through the House this week it would give both technical and fundamental traders cause to buy at the same time which more than likely would lead to a record-breaking move to the upside. Whether or not that potential bounce would hold would largely depend on the coronavirus though. That is still the major unknown in markets right now and if case and death rates in the US continue higher and lead to more states shutting down, or potentially the entire country, traders could quickly return to selling.
For now the overall price trend remains down, but a bounce tomorrow or Wednesday is expected due to technical levels of support being reached and the expectation of a large amount of fiscal stimulus to be announced by Thursday.
Current view has now changed from bearish to neutral due to oversold conditions along with the technical levels reached and expected fiscal stimulus