By Giles Coghlan, Chief Currency Analyst at HYCM
One key technical area to watch
Understanding the moves in the stock markets at the moment can best be understood as a ‘tug of war’. On one side of the rope we have record amounts of fiscal stimulus trying to pull stocks higher. However, on the other hand there are concerns about Q2 results and multiple earnings on the other side pulling stocks down.
Which force will win?
Will see a V shaped recovery? (It is called a ‘V’ shaped due to it being a fast and swift spike down, but then moves up in an equally quick fashion). Or could there be another leg lower in stocks? With so many unknowns remaining the questions continue on and on. The answer to some of these questions depend on as yet unknown solutions. Will a vaccine appear quickly? How widespread actually is COVID19 already? Perhaps, herd immunity is much closer than we thought? How bad will Q2 data actually be? As a result the path ahead is hard to pick.
However, there is one technical tool that is useful in helping us see that path as it emerges. That is the Daily 200 moving average. In the last two major recessions of 2000 and 2008 the 200 daily moving average has acted as a ‘barrier’ to any attempt at a bullish recovery. It will be a key area to look at on any attempt at a so called ‘V’ shaped recovery.
Taking a look at the S&P500 in the 2000 and 2008 recessions you can see the way that the 200 DMA contained price. The 2000 and 2008 recessions were both deep recessions, so they do offer some form of comparison to the current crisis, albeit the current crisis is a medical one. Look at the chart below to see the impact of the 200DMA in 2000 and 2008/9.
So, going forward, look around the 3000 region for signs of a bullish rise higher, or a bearish move lower. It is likely to be keenly watched as a key technical area as that is where the 200DMA is currently sitting. At the moment price is still under the 200DMA and no talk of a V shaped recovery can be had until/if it is breached higher. So, watch the 200DMA going forward for clues as to a stock recovery or otherwise.